 The Great Macro Profit Illusion
Dr. Kurt Richebächer
The
Daily Reckoning
September 9, 2004
The Daily Reckoning PRESENTS
: The bulls have been
bellowing about a superb run of corporate profits over the last
few years. But is it really true? Dr. Richebächer picks
through the numbers...
Is the U.S. economy stalling
out, or is it resuming its strong growth, gaining traction for
a self-sustaining expansion with healthy job and income growth?
In the consensus view, the economy's weakness in the second quarter
was nothing more than a "soft patch." We are no less
sure that "traction" will remain elusive. It is the
essential outgrowth of an upturn that has been of miserable quality
right from the start.
With its advance estimate of GDP growth in the second quarter
of 2004, the Commerce Department's Bureau of Economic Analysis
also released benchmark revisions to the national accounts data
back to 2001. Notable adjustments include a markedly lower personal
savings rate and a downward revision to economy-wide corporate
profits for the past couple of years. The biggest surprise in
the GDP data was the reported sharp slowdown in consumer spending
to just 1% at annual rate. But what about the other major demand
components: business fixed investment, residential construction
and inventories? Most important next to consumption is, of course,
business fixed investment. In the consensus view, business investment
spending continues to post healthy gains, thanks to exceptionally
strong profit growth in the past two years. We have strong reservations
about both the strength of investment spending and the exceptionally
strong profit growth.
Over the full year to the second quarter, nonresidential fixed
investment rose by $108 billion, a remarkable rate of about 10%.
That is, in fact, a healthy gain. But as already pointed out,
the stellar aggregate number conceals an unusually lopsided investment
pattern. The outstanding contributor is computer investment,
thanks to hedonic pricing. Investment in industrial equipment,
the key component for industrial production, was virtually stagnant
over the year.
In addition, the accelerated depreciation allowance for capital
investment spending that was part of the last tax package will
expire at the end of this year. If businesses have pulled forward
investment projects from 2005 into 2004 to qualify for the tax
break, investment spending might slow sharply after the turn
of the year.
Another highly popular argument of the bulls is the U.S. economy's
excellent profit performance in the past two years, as trumpeted
by most Wall Street analysts. Here again, we must plead to keep
things in perspective. Overall corporate profits peaked in 1997
and hit their low in the fourth quarter of 2001, virtually the
end of the recession.
Our focus is always on the profits of the nonfinancial sector.
At their high in 1997, they amounted to $504.5 billion. In the
first quarter of 2000, just before the start of the economy's
downturn, they were down to $426.2 billion. At their low, in
the fourth quarter of 2001, they amounted to $236.5 billion.
In the first quarter of 2004, they had recovered to $420.7 billion.
From the low to the new high, they increased by 77%.
Given the simultaneous steep fall of share prices, this number
certainly has a highly bullish flavor. On closer look, the steep
rise was rather more bearish than bullish. First of all, the
profit level of the first quarter of 2000 was manifestly nothing
to crow about. It ushered in the economy's downturn.
Drawing this comparison, a further point to be taken into consideration
is that today's nominal GDP is up almost 20% since then. In 2000,
those profits were equivalent to 4.4% of GDP. Presently, they
are 3.6%.
Bearing the structural distortions in the U.S. economy in mind,
a most important aspect is the changes in profits between different
sectors. They are, really, the numbers that matter most. For
us, most striking, and also most telling, is the difference in
the profit performance between manufacturing and retail trade.
In 1998, manufacturing earned $157 billion, far more than retail
trade, which earned $66.4 billion. But just six years later,
in the first quarter of 2004, manufacturing profits were drastically
down to $81.5 billion and retail profits sharply up to $80 billion.
There is a similar drastic divergence in profit performance within
the manufacturing sector. Profits of the producers of consumer
durables and capital goods have generally collapsed into persistent
losses. In 1998, they earned a collective net profit of $83.4
billion, accounting for more than 50% of total manufacturing
profits. By 2000, this had shrunk to $60 billion. But in 2003,
a year of recovery, they ran a collective net loss of $3.5 billion.
It is most important to realize this extreme divergence in the
U.S. economy's profit performance because it is symptomatic of
the marked, structural distortion that has been going on in the
U.S. economy. Most remarkable, certainly, is the persistent savage
profit deflation of the producers of high-tech equipment, unquestionably
due to fierce competition. It is needless to say that persistent
losses are prone to choke new investment.
Yet most conspicuous from a macro perspective is the flagrant
diversion in the development of profits between manufacturing
and retail trade. We looked back into the mid-1980s and noted
that manufacturing profits were then about four times those of
the retailers. Today, they are equal. That is, of course, what
has to be expected in an economy in which consumer borrowing
and spending reign supreme.
Regards,
Kurt Richebächer
for The
Daily Reckoning
TDR note: Former Fed Chairman
Paul Volcker once said: "Sometimes I think that the job
of central bankers is to prove Kurt Richebächer wrong."
A regular contributor to The Wall Street Journal, Strategic Investment
and several other respected financial publications, Dr. Richebächer's
insightful analysis stems from the Austrian School of economics.
France's Le Figaro magazine has done a feature story on him as
"the man who predicted the Asian crisis."
This essay was adapted from
an article in the September edition of The
Richebächer Letter.
321gold
Inc Miami USA
|
