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.