Warning – graphics alert!
Yesterday, we got the data for US corporate profits in the second quarter of 2018, along with a revised estimate for US real GDP growth. On the GDP front, the ‘annualised’ rate of growth was revised up to 4.2%, the strongest rate on that measure since the middle of 2014. But this was after some very poor annualised rates (below 2%) in 2015 and 2016. So it’s a bounce back from poor growth.
This 4%-plus growth rate sounds strong and President Trump is making much of it. But it is likely to be the peak of the annual growth rate for this year and beyond. If it is, then as John Ross and others have pointed out, this would be the lowest peak annual growth rate of any president since the second world war.
A more realistic measure of US growth is the year-on-year rate, in other words, how much the economy has expanded in Q2 2018 compared to Q2 2017. On that measure, US real GDP growth was 2.9% in Q2, up from 2.6% in Q1 and the fastest since early 2015. So that also sounds good – but remember that growth rate is still below the long-term average rate for the US economy of 3.3% and it is likely to be the peak rate going forward. And when you strip out population growth and just look at real GDP per person, then the rate is just 2.2%, pretty much where it has been since the end of the Great Recession.
Why is this likely to be peak growth? Well, when we see where the growth came from in Q2, it was mainly from a rise in household spending, particularly on services. Business investment (particularly software and ‘intellectual property’) also contributed but in less of a proportion than in the previous quarter. And there was a big jump in net exports, partly because the cost of imports fell (energy prices subsided). And the upcoming trade war could hit that.
Business investment was led by more shale oil construction and intellectual property.
The driver of this investment was the sharp increase in corporate profits in the second quarter – and that was all down to Trump’s corporate tax cuts and subsidies to the large corporates. Corporate profits rose $72bn in Q2 compared to a rise of $27bn in Q1. Corporate profits are up 7.6% from the same time last year. If you strip out financial sector profits, the growth in profits in the non-financial sector was still 6.6% yoy. And, after tax, corporate profits in Q2 were up 16.1% yoy!
But while in the first half of 2018, profits have jumped, thanks to the tax cuts, before-tax corporate profits are still below their peak in 2014. After the effect of the downswing in 2015-6, US corporate profits have basically been flat for four years.
Cash flow has poured into US corporations from Trump’s tax cuts (the tax bill is down 33% from last year!). But much of this extra money has ended up in dividends to shareholders and share buybacks (likely to reach $1trn this year). The jump in profits has stimulated faster business investment growth but not anywhere as much it has driven corporations to buy their own shares or invest in other financial assets.
While corporations were mopping up a flood of cash into their coffers, there was little improvement in average real earnings for most Americans. Indeed, real weekly earnings are still below levels reached this time last year, while after-tax profits are up 16%.
No wonder the majority of Americans feel no benefit from Trump’s growth ‘success’ – it’s all going to the top.
At the same time, the much-Trumpeted program to reverse the crumbling and increasingly dangerous infrastructure in the US shows no signs of emerging. Government investment continues to be squeezed.
Q2 2018 will be the peak in US growth as it will be for corporate profits as the effect of Trump’s one-off cuts dissipate. And we still have the impact of Trump’s protectionist policies on global growth to factor in.
Economic activity is weakening again in Europe. The composite PMI is a survey of perceived activity. Anything above 50 means growth, below is contraction. In this third quarter of 2018, the PMI dropped back in the Eurozone (54 from 59 at the beginning of the year), was slightly down in Japan (52); and was flat in the US (55). So all three areas are still growing but the pace is decelerating.
And then there is the emerging ‘emerging market’ debt crisis – Argentina, Turkey, Venezuela onto Brazil and South Africa. So the last quarter is not going to be exceeded this quarter.
Michael Roberts Blog 
To add to the important info Michael has provided, here are some inflation adjusted figures. Adjusted for inflation (GDP deflator), non-financial pre-tax profits in real terms were down 8.9% from the final quarter of 2014, while the net surplus was down 5.4%. Total corporate profits were down 5.9% (all data Table, 1.14). However, without adjustments, total corporate profit was down 13.8% and for non-financial corporate it was down 13.8%. Even with depreciation added back, corporate cash flow (unadjusted pre-tax plus depreciation) was still down 5% in real terms compared to 2014. As this appears to be the high water mark for profits, profits have plateaud below its 2014 peak. This is very significant. It means that the US economy never emerged from the phase of rising animation.
There is an error. Unadjusted non-financial corporate profits were down 16.6% not 13.8%.
A couple posts ago, I commented that the only long-term economic solution I saw for the USA was WWIII where it could be able to completely destroy Russia and China while not suffering catastrophic anihilation in its own territory.
Now, curiously, I dig up an article from 2014 titled “Waiting for World War III: How the World Will Change” (Дмитро Сінченко [Dmytro Sinchenko], «В очікуванні Третьої світової війни. Як зміниться світ,» [«Waiting for World War III: How the World Will Change»], Радіо Вільна Європа/Радіо Свобода [Radio Free Europe/Radio Liberty], September 8, 2014.) where a guy named Dmytro Sinchenko (an Ukranian from Kirovograd, born in 1986 and, since 2013″blogger, political consultant, head of the NGO “Association of Political Science”).
In this article, he make an apology for waging WWIII by the USA, with the main strategic objective balkanizing Russia into at least three countries: European Russia, Siberia and Far East Russia (i.e. realizing Zbigniew Brzezinski’s dream in the 1990s). It envisages a new, expanded European Union, which would stretch from the Levant (Trukey, Syria and Israel) to Greenland; from Norway to North Africa (Egypt, Libya, Tunisia, Algeria and Morocco). The dream of the defunct Roman Empire coming true.
A summary of the article can be found here:
https://www.globalresearch.ca/redrawing-the-map-of-the-russia-federation-partitioning-russia-after-world-war-iii/5400748
That’s nonsense. The advantage of this blog from Michael is precisely that he uses economic data and evidence to investigate what the opportunities are that our rulers have, not what their dreams and illusions are.
Mr. Roberts has already explained to us in many previous posts that the only way out of a depression for capitalism is a large scale war (e.g. WWI and WWII). War destroys old value and less productive capitals and generates space for new, more productive capitals.
So, yes, war is a macroeconomic device and I think it is pertinent here.
Actually VK, I do not say that war is the only way out. See my view in my book The Long Depression.
No capitalist nation seeks a “way out for capitalism”. Every capitalist nation seeks only a way out for itself. Every capitalist nation acts in its own interest, not in the “interest of capitalism”. No rational person views wars alone in economic terms.
The Russian and German revolution developed from the First World War, as well as the independence movement in the British Empire. The Chinese Revolution, Indian Independence and anti-colonialism in Africa and Asia developed from of the Second World War. Through each of these wars traditional powers weakened. Since 1945, the US has become weaker, not stronger, by every single war. War is no way out for capitalism.
Yes, I know. I’m stating it is the only way out for the USA (more specifically, the USA as the “lonely superpower”).
Capitalism, obviously, doesn’t depend on the USA to survive. But war is a correction mechanism for capitalism and is, and will, be used.
I agree with you, Wal B. — today’s capitalism is not ideal capitalism (“real capitalism”?).
But you have to admit the USA is capitalism’s magnum opus. Having a country like that as the HQ of world capitalism helps keeping the system alive.
Dear Dr. Michael Roberts, I am a lucky reader of your articles.
I write, to ask what would happen if the official statistical premises that you use were not real, or officially distorted?
The John Willims’ Shadow Government Statistics website (Analysis Behind and Beyond Government Economic Reporting) has been producing alternative estimates for years, according to John Williams:
A recent example is Alternate Gross Domestic Product GDP Annual Growth – Official vs. ShadowStats (Annual Change throug 2018q2 (ShadowStats, BEA), where in the face of official optimism the alternative calculation is negative. http://www.shadowstats.com/alternate_data/gross-domestic-product-charts
I would appreciate your comment
Michael — I’d love to read your reaction to this Wall Street Journal article: https://www.wsj.com/articles/job-openings-exceed-unemployed-americans-again-in-july-as-employers-feel-the-pinch-1536691533?mod=hp_major_pos10
Maybe I’m a poor reader but the article’s talk of an increasingly tight U.S. labor market, “average hourly earnings for private-sector workers [rising] at the best rate in August since the recession ended in 2009,” etc., doesn’t seem to entirely jibe with what you’ve written. (Of course, the capitalist class is getting richer, etc. — it’s the “little improvement in average real earnings” that contradicts the WSJ piece.
Of course, I trust you more than I trust the WSJ, but…your thoughts?
There has been a bit of a rise in average hourly earnings for private sector workers in the last two quarters although it is still relatively modest compared to previous recoveries after recessions. And remember, this is hourly earnings, not the weekly pay packet. And for non-managerial workers, the increase has been much weaker than for managers, let along top executives! Indeed, full-time male workers on average are getting the same real pay that they had in 1988!
I have noted that since the near recession of 2015-16, there has been a pick-up in growth and yes wages a little. But I also argue that this wont last much beyond this year, if that.
See this excellent piece by Jack Rasmus: https://jackrasmus.com/2018/09/04/labor-day-2018-the-myth-of-rising-wages-print/