I thought I would take a break from making fun of MMT, Trump and the human nature bulls to do some economics, which is probably too strong a term.
But here are a couple pictures based on the profits data included in last week’s revisions to the Q1 GDP figures. In my view, bean counting the GDP add-up is mainly a waste of time, but there is some interesting stuff in the National Accounts. How could there not be?
Here is the first thing to catch my eye, in part because I am inclined to look for it. Early this cycle, real output from the domestic operations of nonfinancial corporations was booming, far outpacing the tepid recovery in overall GDP. The GDP figures distracted a lot of equity types from the fact that the fundamental cyclical driver of profits was performing very strongly and was grounds for optimism.
Margins went up too, which the bears were oddly inclined to dismiss as not really counting (WTF?), but margins are cyclical and responded to the output boom in the part of the economy that was not being held back by the aftermath of the housing bubble collapse. I am still not sure if this simple historical point has been internalized, even by the bulls.
The thing is, though, that story is now very stale, as measured corporate sector output is now lagging the overall GDP. I am not confident the lag will continue. But it does seem that the period of corporate outperformance is long past. Basically, we have already had the bounce in goods demand, driven by the renormalization (or partial renormalization) of all forms of investment, including in consumer durables.
Second and predictably related, profit margins have been coming down. I am not a fan of margin mean reversion. To me it is more useful to look out the window at the cyclical drivers of margins and ask if they point up or down. Recently, they have pointed down, because we are past mid cycle, so I have looked for narrower margins. But I would not have guessed – did not guess – that the compression would be this quick.
Measurement is always an issue here. In particular, I would not be shocked if Brad
Settler Setser – an expert in this area – were to point out that there is some goofy invoicing going on US corporate transfer pricing, which is holding down both measured exports and domestic profits. One way to get around this would be to look at overall profits and not just domestic. But I am not sure what the denominator should be there.
Maybe I should do some simulations incorporating Setser’s estimates into the profit story. Sorry, too lazy. I don’t get paid for this. I doubt it would overturn the basic story. Maybe it would make these data look closer to what I would have guessed. If you are getting paid to do actual work, get on it.
Separately, this has nothing to do with the cycle or market, but the fact that margins are back to the neighborhood of “average” gives me even greater skepticism that looking at the labor income share (which is supposedly depressed) tells us anything about anything, including income distribution.
The abstraction of “factors of production” may be a bit dated for the modern economy. If I wanted to be a dick, I would even say it is Marxist, but I am just your humble and objective analyst.
I may have more on this later. I am pretty sure the rich guys are rich because of aspects of their sitch that are not well described by “factors of production.”