Relevant and even prescient commentary on news, politics and the economy.

Effective Tax Rates

Along with fourth quarter  GDP, corporate profits for the the fourth quarter was also reported.  Profits growth was either quite strong or very weak depending on how you looked at them.  On a year over year basis, after tax profits growth was 11% and appeared to be accelerating. However, on a quarter to quarter basis after tax profits actually fell -6.73% (SAAR) in the fourth quarter  and that is after a third quarter annual growth rate of only  3.7%(SAAR).  By comparison after tax profits growth surged 38.4 % (SAAR) and 14.0 % (SAAR) in the first and second quarters, respectively.  Much of this early 2018 growth was due to the tax cut.  But now that the tax cut is behind us, it looks like the Administrations promised strong growth remains just that, a Republican  forecast and we all know how seriously to take them.

 

After this it looks like a good time to look at the impact of the corporate tax cut on the effective corporate tax cut — taxes as a share of  pre-tax profits.

The effective tax rate fell from around 20% to just over 10%.  That sounds like a big drop, but compared to the historic trend where the effective tax rate has fallen from almost 50% in 1950 to just over 10% now it does not look like such  a massive tax cut after all.  Moreover, as the data shows the big impact appears to be behind us and is unlikely to provide much of a boost to growth in 2019.

It also raises serious questions about the Republican promises to eliminate loopholes and other special arrangements so that the revenue loses from lower corporate taxes would not be significant.  I have not seen them make much of an effort along those line.  But maybe I am missing something and commenters can point out such legislation.

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Real personal income and spending sag

Real personal income and spending sag

Along with jobs and wages, household and personal income and spending are my main focus on how average Americans are doing in the economy.

We’ll get the next jobs report a week from now, but today we got – almost updated to the present – January personal income and February personal spending.

First of all, in my rubric of long leading, short leading, and coincident indicators, both of these are coincident. They tend to top out, or at least sharply decelerate, right when a recession begins. Here’s the performance of income including the last two recessions, and spending for the last one:

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The last long leading indicator, corporate profits, declined in Q4 2018

The last long leading indicator, corporate profits, declined in Q4 2018

Three months after the quarter ended, corporate profits for Q4 of 2018 were reported this morning, and they were down slightly (-0.1%). Here’s the quote from the BEA:

Corporate profits deflated by unit labor costs are a long leading indicator. Since these costs were already reported at +1.6% q/q, that means that adjusted corporate profits were down about the same percentage.

>Earlier, proprietors income for Q4 had been reported at positive, but that is a less accurate placeholder. In contrast, Q4 corporate earnings for the S&P 500, with 99.7% reporting, declined over -3% q/q.

This means that, in Q4 of last year, almost *all* of the long leading indicators declined, the first time that has happened since – perhaps not coincidentally – shortly before the last recession.

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Here’s a model that didn’t pan out in 2018

Here’s a model that didn’t pan out in 2018

A little over a year ago, I proposed A simple model of interest rates and the jobs market. As I explained at the time, “during the past such era of [low interest rates in] 1930-1955 several recessions including the very bad 1938 recession occurred without a yield curve inversion, I have been looking at alternative measures.”

What I found was that “a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.”

Here’s the graph I posted of “the relationship I describe in the above paragraph over the last 60+ years:”

Another graph “subtract[ed] the YoY change in the Fed funds rate from YoY payroll growth, and subtracts a further -0.5%, showing that even when the relationship gets that close, with the exception of 2002-03 (a near recession), a recession has always followed:”

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Capital Flows in a World of Low Interest Rates

by Joseph Joyce

Capital Flows in a World of Low Interest Rates

Interest rates in advanced economies continue to persist at historically low levels. This trend is due not only to the response of central banks to slow growth, but also fundamental factors. If these interest rates continue close to their current levels, what are the consequences for international capital flows?

The decline in rates in the advanced economies has been widely documented and studied. Lukasz Rachel and Thomas D. Smith of the Bank of England have investigated the determinants of the fall in global real interest rates. They attribute the decline in part to increased savings due to demographic forces, higher inequality and a glut of precautionary savings in emerging markets. Investment spending, which has fallen due to the falling price of capital and lower public investment, also contributes to low interest rates. Most of these factors, they claim, will continue to prevail.

Lukasz Rachel and Larry Summers of Harvard have also looked at falling real rates in the advanced economies, which they attribute to secular stagnation. They point out that since the current rates reflect higher levels of government debt, the interest rate that we would observe if there was only a private sector would be even lower. They urge policymakers to tolerate fiscal deficits and also to engage in policies to increase private investment.

The low rates have been an incentive to potential borrowers, and consequently debt levels have risen. The IMF has updated its Global Debt Database,  which includes private and public debt for 190 countries dating back to the 1950s. The data show that the three currently most indebted countries are China, Japan and the U.S., accounting for more than half of global debt. The increase in the debt of China and other emerging markets is due to increases in private debt. Corporate borrowing in these countries has soared, and much of it is denominated in dollars. Public debt has risen in the advanced economies, and more recently in the emerging market and low-income countries as well.

 

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February housing data indicates slump not over UPDATED

by New Deal democrat

February housing data indicates slump not over UPDATED

Housing data, in the form of February permits and starts, finally caught up after the government shutdown. Two sources of house price data were also released this morning.

The bottom line is that, depending on how you measure, housing construction is likely either at or just slightly above a short term bottom. Price growth, meanwhile, continues to decelerate.

I have a more detailed analysis in the queue at Seeking Alpha. Once it is published, I will link to it here.

UPDATE: Here’s the link to the Seeking Alpha article. As always, reading this not only should help you understand what is going on this important market, but rewards me a little bit for my efforts.

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The coming slowdown in employment

The coming slowdown in employment

Last summer I wrote a piece entitled “What the compressed yield curve means for employment.” I re-read it over the weekend, and in light of what has been going on in the bond market, I thought it was worth an update.

Let me pretty much re-quote the entire piece:

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Four times during the 1980s and 1990s the difference in the interest yield between 2 and 10 year treasury bonds got about as low as it is now [Note: i.e., August 2018] (blue in the graphs below). That occurred in 1984, 1986, 1994, and 1998.

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Weekly Indicators for March 18 – 22 at Seeking Alpha

by New Deal democrat

Weekly Indicators for March 18 – 22 at Seeking Alpha

My Weekly Indicators post is up at Seeking Alpha.

As you can imagine, the big news was about the fact that almost every single yield curve there is – except the one I report on every week in that post – inverted yesterday.

Also, as I mentioned in an e-mail to a couple of folks this morning, the big thing that bothers me is that ***EVERYONE*** is watching it. And a forecasting tool that everyone pays attention to, ceases to be an accurate forecasting tool. It’s called “Second Order Chaos.” Humans are very clever and intelligent chimpanzees, and when you observe them, they observe you back, and react to the observation.

Anyway, as usual, clicking over and reading helps reward me with a little $$$ for my efforts.

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Over 50% of all wealth in the US is inherited not earned

Over 50% of all wealth in the US is inherited not earned

I got waylaid putting together a very detailed post about how the newly-widened Panama Canal is disrupting the internal US transportation network. When it goes up at Seeking Alpha, I’ll link to it.

In the meantime, here is something that I found a week or two ago for you to chew on. Over half of all US wealth is not earned but inherited:

Click on picture to enlarge.

According to a report summarized recently in the Washington Post, “The wealthiest 1 percent of American households own 40 percent of the country’s wealth.”

It’s likely that about 25% of all wealth in the US is inherited of the top 1%. I strongly suspect the relationship is even more egregious at the level of the top 0.1% and top 0.01%.
It’s hard to argue that the US is at all a meritocracy when the starting points are so distorted.

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… And, the 10 year treasury yield inverts

… And, the 10 year treasury yield inverts

Yesterday over at Seeking Alpha I wrote about how the Fed is boxed in. The essence of the article is that, while lower rates are good for the housing market, a fuller yield curve inversion adds to the evidence that a recession may take place first, unless the Fed completely reverses course and starts cutting interest rates very soon.

Please click on over and read the whole article. Not only should it be educational for you, but it rewards me a little for my efforts in writing about the economy.

And so what do I see when I check out interest rates this morning? This:

For the first time, the yield curve inversion has spread to the 10 year Treasury, which is yielding less than either the 6 month or even the one month Treasury bill.

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