Weekly Economic Report
Forget the yield curve, look at profits. Each month, when we get the new GDP data, we look at corporate profits as the key leading indicator of the economy. This quarter, domestically produced profits declined slightly, by -2.5% -- but that comes after two quarters in which profits rose at an average 18.1% from a year ago. In the fourth quarter, profits are up 9.4% from a year ago. Corporate revenues rose 5.7% in 2018, up from 4.1% the year before. This 1.6% gain was roughly twice the improvement seen in the rest of the economy. Meanwhile, compensation growth slowed from 5.2% to 4.9%. The spread between revenues and compensation times ten is a long standing rule of thumb for calculating profits, and it was again this year. Bottom line, firms do not plan for contraction when profits – and more importantly profit margins – are rising. Typically, it takes a year-long decline in profits to cut jobs. Despite concern that US GDP growth will cool in 2019, few see nominal growth under 4%. Wages at 3% would compensate workers for 2% inflation and 1% productivity. Meanwhile, firms could increase hours at a 1% annual rate, which would keep unemployment flat to falling. Trend growth may be more boring than a tax stimulated boom – but it remains profitable.