by Michael Roberts
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.
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