On the Road: Profit Growth Disappointing in Latest Data

  • by itradmin - Wed, 04/04/2018 - 16:14
Connor Lokar

Profitless prosperity? Not quite. However, US businesses closed 2017 not with a bang but with a whimper in the latest corporate profitability data. US Corporate Profits during the fourth quarter of 2017 (finalized data released late last week) came to $2.212 trillion. On the surface, that looks and sounds like an incredible sum, but upon deeper examination it is not a very encouraging data point.

These include:

  • Profits were up a modest 2.7% from 4Q16 earnings of $2.156 trillion.
  • Profits have yet to top the all-time mark set three years ago in 4Q14 ($2.232 trillion).
  • Profits generally slowed in their rate of rise throughout 2017, especially during the second half of the year.
  • As a 13-month leading indicator to US Industrial Production, the ongoing slowdown is increasingly foreboding for the broader US business cycle in the latter half of 2018.

Even more troubling is the outright decline in US Corporate Profits for Domestic Nonfinancial Industries, which contracted 9.5% year over year during the fourth quarter of 2017. This is an 11-month leading indicator to US Nondefense Capital Equipment New Orders (excluding Aircraft) and is thus in line with our expectation for slowing business-to-business activity during the second half of 2018.

As economists, we view profits as a positive for the US economy. In fact, they are not only necessary but the lifeblood of business investment in this country and one of our closest watched leading indicators. The fact that US businesses were struggling to push their profits higher in the face of rising input and labor costs before the potential tariff derived supply chain disruptions that we have witnessed in recent weeks is troublesome. The tariffs, which we have discussed at length in prior blog posts and our latest Trends Report™ executive summary, will likely cost jobs in some manufacturing sectors and all phases of the exporting process. It is also likely to stoke inflation in many areas of the economy as US importers pass on the costs to protect their already stressed margins.

The potential silver lining here is that we are looking at the final earnings from 2017, before the US tax reform package took effect. Upcoming earnings reports for the first quarter of 2018, the first full quarter of US businesses operating under the new tax code, will be important. If tailwinds from tax reform and overall economic acceleration overmatch other headwinds, tariff related or otherwise, then we can be more optimistic about the second half of 2018.

Connor Lokar