Corporate profits were one of the week's
overlooked indicators but delving into the details of this quarterly
report offers insights on both taxes and profits and also leads to
another of the week's reports, personal income and outlays where wages
and salaries are tracked. Other indications in the week include unusual
news out of housing and disappointing news on November consumer
spending, at least a portion of November's consumer spending.
The economy
Corporate
profits, on which share prices are ultimately valued, haven't been
showing anywhere near the growth of the stock market. First let's look
at pre-tax profits which are the light blue area of the graph, at an
annualized rate of $2.22 trillion in the latest data which are for the
third quarter. This is just short of the $2.23 trillion peak in
fouth-quarter 2014 after which the oil slump pulled the numbers back to
the $2 trillion line. Pre-tax profits first peaked over $2 tillion in
2012 and really haven't expanded that much, only 10 percent over the
past five years. Turning to the dark blue area of after-tax profits,
they're doing no better and are also up 10 percent over this time, at
$1.74 trillion in the latest data.
The
green area of the accompanying graph is the difference between pre-tax
profits and after-tax profits, coming in at a $476 billion annualized
rate in the third quarter. Here too, flat is the theme with the gain
over the past five years at about 7.5 percent. A sharp cut in corporate
taxes could boost after-tax profits by $100 billion or more which is
sizable of course, but would it be enough to justify ongoing inflows
into the stock market? When keeping score in the unfolding tax debate
in Washington, note that the latest anualized tax level ($476 billion)
is equal to 21.5 percent of the quarter's pre-tax profits ($2.22
trillion).
Other
data in the week included personal income and outlays where wages and
salaries are tracked. This component is reported on a monthly basis and
came in at an $8.43 trillion annualized rate in October. The 5-year
growth rate here is more tangible but still modest, at 20 percent.
Though this is mostly positive for workers the mismatch between wage
growth and profit growth points to a squeeze underway for businesses
and speaks to weak productivity which is one of economy's central
problems right now.
Let's look at the government's fiscal 2017 which
ended this last September to see how tax receipts play out month to
month through the year. Corporate taxes, the blue area at the bottom of
the graph, don't really start coming in until December with April and
June also significant months. Individual taxes, the large green area,
also rise in December and especially of course in April and make up the
overwhelming share of the government's total receipts, at 48 percent
in fiscal 2017 vs only 9 percent for corporate taxes (social insurance
receipts, excise taxes and custom duties make up the balance). Compared
to 5-year growth of only 7.5 percent for corporate taxes, individual
taxes are up a very immoderate 40 percent, from $1.13 trillion in
fiscal 2012 to $1.59 trillion in fiscal 2017. When it comes to the
budget, individual taxes are the government's bread-and-butter
category.
This
year's spike in the stock market may be predicated to a significant
degree on expectations for corporate tax cuts and their long-term
effects but it's not based on any ongoing burst of growth. Yes, GDP has
made the 3 percent grade the last two quarters but consumer spending
hasn't been the spearhead. Modest to moderate has been this year's
consistent theme of the Federal Reserve's Beige Book and this
description fits two key consumer readings: personal income and
spending. Widening out from wages and salaries and including other
income like rent, interest and proprietor income, personal income is
about double wages and salaries alone but is doing no better, up only
3.4 percent in the latest annualized data. Consumer spending has been
doing better, at a 4.2 percent rate but still posing no threat of
overheating.
Housing
has also been far from overheating but not the last two new home sales
reports where a breakout is underway. Sales of new homes, tracked by
the blue line, surged 6.2 percent in October to a 685,000 annualized
rate and a new expansion high. A downward revision to September was
limited, holding at an unusual gain of 14.2 percent to a 645,000 rate
which is now the second highest this cycle. For those wondering about a
housing bubble, this sudden sales surge hasn't yet led to a price
surge with the median price of new house, at $312,800, up only 3.3
percent on the year. The graph's green columns of existing home sales
have yet to show anything like this kind of life though the week's data
does include a hint of oncoming strength as the pending home sales
index, which tracks initial resale signings, climbed 3.3 percent. Added
to this is a sharp upward revision in the week to housing permits
which jumped 7.4 percent in October to a 1.316 million rate.
Indications are now in place that point to a substantial fourth-quarter
contribution from the housing sector.
One
area of the economy that has been surging all along is the labor
market. The outlook for next week's highlight — the November employment
report — is very positive and is based largely on low levels of jobless
claims. Puerto Rico has been inflating recent claims totals but only
to a limited degree, falling to 2,965 in the latest data for the
November 25 from a post-hurricane peak at nearly 8,300 in early
November. Before climbing, claims in Puerto Rico first fell following
Maria's September strike as the unemployed, due to the destruction,
were unable to file and the decline in the latest week suggests that
worst is now behind. Total new claims fell 2,000 in the latest week to
238,000 with the unemployment rate for insured workers holding at a near
record low of only 1.4 percent.
The
week's last bit of economic news is unit auto sales and the first hard
indication on consumer spending during November. The results came in at
expectations with unit sales falling sharply to a 17.5 million rate
after peaking at 18.6 million during the hurricane-replacement demand
of September and October. Unit sales don't always track cleanly with
dollar sales as measured in the retail sales report yet the results do
confirm that consumer momentum isn't unlimited and they strongly
indicate that motor vehicles will be pulling down on November retail
sales.
Markets: How confident are you really?
Another
report issued in the week was consumer confidence which can't stop
rising, to 129.5 in November for a new expansion high. Optimism over
jobs has been the major factor boosting the index but expected stock
market gains are another as 46.0 percent of the sample see stocks
rising over the next year, which is up 3.8 percent from October, and
only 19.0 percent see the market going lower, down 3.7 percent. Such
readings really offer contrarians the chance to test their theories.
LIke two sides of a coin, note the close relation between consumer
confidence and the stock market here represented by the Dow.
Markets at a Glance | Year-End | Week Ended | Week Ended | Year-To-Date | Weekly |
2016 | 24-Nov-17 | 1-Dec-17 | Change | Change | |
DJIA | 19,762.60 | 23,557.99 | 24,231.59 | 22.6% | 2.9% |
S&P 500 | 2,238.83 | 2,602.42 | 2,642.22 | 18.0% | 1.5% |
Nasdaq Composite | 5,383.12 | 6,889.16 | 6,847.59 | 27.2% | -0.6% |
Crude Oil, WTI ($/barrel) | $53.71 | $58.97 | $58.35 | 8.6% | -1.1% |
Gold (COMEX) ($/ounce) | $1,152.50 | $1,292.60 | $1,283.20 | 11.3% | -0.7% |
Fed Funds Target | 0.50 to 0.75% | 1.00 to 1.25% | 1.00 to 1.25% | 50 bp | 0 bp |
2-Year Treasury Yield | 1.21% | 1.74% | 1.77% | 56 bp | 3 bp |
10-Year Treasury Yield | 2.45% | 2.34% | 2.37% | –8 bp | 3 bp |
Dollar Index | 102.26 | 92.76 | 92.9 | -9.2% | 0.2% |
The bottom line
Economic conditions are solid but not other
worldly like the stock market. The economy could definitely get a boost
from a tax cut which however could very well in turn be offset, at
least in part, by what appears to be a series of coming rate hikes by
the Federal Reserve including one at this month's FOMC. Stocks are
getting a lot of mileage from taxes, but the Fed looks to be a new front
for the market.
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