The Bureau of Economic Analysis (BEA) has revised its preliminary estimate of GDP. That can only mean one thing: time to look at corporate profits again. Included along with the recalculated headline output estimate is the BEA’s first run of profit figures. If you are Jay Powell, you aren’t going to like what you find.
First, real GDP in the third quarter was practically unchanged. Revised from around 1.90% (continuously compounded annual rate of change) to a touch above 2.10%, either of those estimates are pretty much equivalent to the unrevised 1.99% growth believed to have taken place in Q2.
Still the slowdown from 2017-18. But what everyone wants to know is, what does this downshift really mean? Did the US economy simply revert to its (already too low) mean potential after a minor reflation high last year? Or is it transiting from reflation into a weaker possibly more dangerous state beyond the simply lackluster? The last time around, four years ago, it was the latter.
Jay Powell and the official position says it is the former. Buoyed by tax reform and slightly more favorable global conditions (he says), 2018 was equivalent to a very small sugar rush. Taking on some unknown but “transitory” cross currents late in the year, as 2019 wears on the unflinchingly strong labor market will more and more support the economy keeping it around average at worst.
In order for that to happen, though, the labor market has to actually be strong. Not just the unemployment rate, either.
That’s where corporate profits come in. As much as anything, the general willingness of businesses in the US (as anywhere else) to add more labor is related to both the top and bottom lines of their income statements. Revenue growth driving profit growth means a lot more net hiring.
No revenue growth and therefore profit problems, a lot less. I’m not really going out on a limb here, illustrating nothing more than the basics you already know quite well.
As economic profits accelerated in the past, the rate of payroll expansions did, too. This isn’t rocket science.
What the BEA’s income accounts have been suggesting is that they aren’t accelerating, having reached a peak rate all the way back in 2014 (which wasn’t all that high, even though it added up to the “best jobs market in decades”). Since, profit growth has been at best stagnant (depending upon the BEA series) and at worst declining.
Unsurprisingly, as you can see above, that near exactly matches what the Bureau of Labor Statistics (BLS) has been consistently reporting for years as far as its Establishment Survey has been concerned. The only difference is that this has gone unreported by the mainstream media which continuously described the situation as “robust” no matter how much it wasn’t....