Third quarter corporate profits were released as part of the first revision of GDP this morning. Since corporate profits deflated by unit labor costs are a long leading indicator, let’s take a look.
Here is the raw corporate profits table released by the Bureau of Economic Analysis:
Lines #3 and #11 are the two we are interested in. Both measure corporate profits after tax, with and without inventory adjustments. The first increased quarter over quarter by +3.3%; the second by +0.7%. Note that this q/q result (as opposed to YoY) is not affected by the tax cut enacted last December.
A few weeks ago, unit labor costs were reported to have increased by +0.3% in the third quarter.
As a result, regardless of which way we measure, corporate profits increased in Q3.
Between increased corporate profits and loose lending, as reflected in the Senior Loan Officer Survey several weeks ago, the producer side of the economy continued to do very well through September. Although several other long leading indicators, most importantly interest rates and housing turned negative by the end of September, this is enough to confirm that, left to its own devices, the economy should not roll over into recession in the first three quarters of next year.
The “left to its own devices” part in the above sentence, however, is an important qualifier right now, because it does not include the effect of Trump’s tariffs. This is an ongoing and generally haphazard public policy intervention into the market, and the early results, as measured by rail traffic in particular, have been negative. It is simply impossible for me to do anything more than guess how much that might change the conclusion. At the most, I would hazard that Trump will continue to add tariffs, and that it *could* take a weak economy, such as I already foresee for next summer, and tip it into contraction.