The Bureau of Economic Analysis reported today that corporate profits in the second quarter rose only 3.3% annualized after a 39.9% surge the quarter before. Corporate profits are unchanged on a year-on-year basis, compared to up 2.8% in the first quarter.
The manufacturing sector, which has kept the economy afloat, offered some more good news earlier in the week. The Chicago Fed's national activity index improved to minus 0.06 from an upwardly revised minus 0.38 in June. The three-month moving average improved sharply in July, to minus 0.29 from minus 0.54 (upwardly revised from minus 0.60), according to Bloomberg.
Retail sales during the August 20 week slowed to an annualized 3.6% rate, ending a three-week run of rates over 4%. Housing continues to sink. Last week's report on existing home sales showed surprising contraction. This week, it was reported that new home sales dropped 0.7% for the month. Prices of both existing and new homes contracted in July by a steep 6.3%.
An increasing number of economists and analysts are joining the chorus that we are headed for recession or are already in one. The S&P 500 has risen 3.2% in the past four days, possibly posting the first weekly advance in five weeks. Traders believe that Fed policy makers will act to support growth. It is almost certain that they will be disappointed. There are strong dissenting voices on the FOMC against current policy, so further easing will meet resistance. Besides, rates cannot go much lower.
The Great Depression was made significantly worse by errant fiscal and monetary policies. The Smoot Hawley Act raised tariffs on imports and trade that caused a global trade war essentially shutting down international commerce when it was needed most. This time, we find that it is the void of policy guidance that threatens the economic health of the country and, therefore, the world.
The failure of the executive and legislative branches to spell out the direction of taxes, regulations, and entitlements are becoming powerful dis-incentives to growth. Businesses are communicating loudly and clearly that they will not hire nor will they substantially invest in new plant or equipment until they have a much clearer and longer-term picture of what it will cost in taxes and regulations to do business in this country. With a presidential election relatively close, politics weigh heavily against the possibility of meaningful compromise before the next election, but it is possible.
For now, there appear to be few economic catalysts to growth beyond what policymakers have within their power to offer; if they will. The recipe is pretty simple: tax reform aimed at providing a simpler, flatter, lower, and dramatically more uniformly applied code (free of loopholes), reduction and streamlining of regulations, and the biggie – entitlement reform. But odds of passage of anything remotely effective emerging amidst the current political climate seem infinitesimally small. But hope springs eternal.
Time to return to hurricane preparation. Stay safe this weekend.
