dinsdag 1 augustus 2017

There Are Two Problems With Trump's Tweet About Record Corporate Profits

Earlier today, in an attempt to deflect from the relentless scandals that plague his administration, Trump tried to pivot attention to either the stock market, highlighting the record high 22,000 print in the Dow Jones, while also pointing out that "Corporations have NEVER made as much money as they are making now."
# Donald J. Trump ✔ @realDonaldTrump "Corporations have NEVER made as much money as they are making now." Thank you Stuart Varney @foxandfriends Jobs are starting to roar,watch! 
There are two problems with this tweet. First, it's wrong. While on a non-GAAP basis, which excludes the impact of "one-time, non-recurring" items, and pretty much anything else management does not want counted, with the explicit blessing of the biggest moneys in the room known as the FASB, which allows companies to ignore countless above the line expense and cost items, adjusted "profits" may indeed be at an all time high, but those "profits" are a monetary mirage, meant only to justify the record high level in the S&P ever applying (ever greater) P/E multiples. Meanwhile, what is going on in the real economy, where companies are taxed on their real profits as disclosed to the IRS, is that real profits, which the BEA defines as "Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj)", have not only stagnated for the past 5 years, as the latest NIPA GDP number reveal...


But have contracted in recent quarters...


In other words, corporate profits may be all time high for non-GAAP purposes, but in the real world, corporate profits have barely budged in years. For those interested in the difference between NIPA corporate profits and reported earnings, read the following BEA note. This discussion ignores the question whether Trump should be pushing for higher corporate taxes if indeed, as he claims, corporate profits have never been higher. There is a second problem. With corporate profits rising rapidly in recent years, this has been almost exclusively at the expense of wages and compensation. This is shown in the chart below, which shows that while the profit share of GDP has stabilized over the past quarter, labor Share of GDP is at an all time low, and has fallen further in recent periods. And while labor share of GDP may increase as wages (finally) grow rises, increased capex, especially into productive assets, will limit this growth...


The second chart is especially troubling for Trump because it was the collapse in the labor share of GDP that prompted the populist revulsion against the status quo, and got Trump elected in the first place. Should Trump wish to cheer the record divergence between the corporate and labor share of GDP, his days in the White House may be even more curtailed expected....