Does Investment Banking Employment Respond to Corporate Profits?

The importance of corporate profits is a forgone conclusion in the investment banking world. One might think that because corporate profits are so important, investment banking employment responds to corporate profit conditions.

Is this presumed conclusion correct?  The following is a look at the historical connection between employment in the investment banking business and the state of corporate profits. Perhaps unsurprising, the relationship ebbs and flows through time.  It’s certainly true that, at times, corporate profits affect investment banking employment, but the connection is only weak.

Employment in the Investment Banking Industry

The following two graphics look at employment in the investment banking industry since 1990. The first figure looks at actual, estimated employment in the investment banking industry. The second figure is a year-over-year percentage growth look at investment banking employment.

Overall, since 1990, there’s only been one large investment banking slowdown.  It occurred from August 2008 to September 2009. The other periods of employment weakness in the investment banking sector were short-lived.  The short weaknesses occurred in such short time frames as September 2003 to April 2004 and August 2010 to January 2011.

The weaknesses, of course, stem from economy-wide weakness and/or regulation.  The 2008/2009 deterioration occurred as a result of the housing market-induced global financial crisis.  The 2003/2004 weakness stemmed partly from the aftermath of the bursting of the technology bubble.  The 2010/2011 weakness likely stemmed from concerns about regulation related to Dodd-Frank, commodities trading, and other regulatory issues.

Investment Banking Employment

Shifting to a look at the year-over-year growth picture, there’s really only been a few years when year-over-year growth in the investment banking sector went negative.  The worst of the months occurred in August 2009, when year-over-year growth dropped to -9%.

Interestingly, prior to the 2008 financial crisis, investment banking employment was almost always on an upward trajectory.  The only question was – how fast would employment grow?  The range in positive growth during the 1990s goes from a high of 16% in August 1997 to a low of 0% in March 1992.

YY Investment Banking Employment

Corporate Profits

The second component of the question is corporate profits.  The top section of the following graphic is actual corporate profits.  The bottom portion is year-over-year growth in corporate profits.

Overall, corporate profits have been through 2 long periods of weakness. The first was a very slow downturn, from 1998 to 2002. The second came as a result of the recent global financial crisis, with corporate profits weakening from 2006 to 2009.

Dashboard 1

Connecting the Two

So, in looking at the visuals, does it look like investment banking employment is connected with economy-wide corporate profits? The following is the overlaid relationship. Overall, investment banking employment is, at times, connected with economy-wide corporate profits.

Even more interesting than the ebb and flow in the relationship is the question of which indicator – investment banking employment or corporate profits – is the leader.

Conventional wisdom would indicate that investment banking employment is the laggard on this question.  After all, why would investment banking employment weaken when corporate profits are strong? As shown, this is sometimes right, and sometimes wrong.

For instance, growth in corporate profits peaked in November 1994 at 23%.  Growth in corporate profits slowly decelerated until bottoming in February 1999 at -13%.  In this same time frame, investment banking employment peaked in June 1994 at 16%, then weakened to 1% in June 1995, then accelerated again until February 1997 at 16%, and then growth slowed again to 8% in September 2001.

Fascinatingly, in this experience, investment banking employment was the leader, with corporate profits as the follower.

YY Growth in Investment Banking Employment and YY Corporate Profits

Conclusion

Overall, investment banking employment and corporate profits appear to be connected.  The connection, though, is complicated.  At times, corporate profits provide a leading indication of where the economy is heading, whereas at other times, investment banking provided the leading indicator.

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