The Business Week In Review

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.