Breitbart Business Digest: Corporate Profits Say No to Rate Cuts

Corporate America’s Profits Scream No Cuts Soon

Somebody forgot to tell corporate America that the stance of monetary policy is restrictive.

Federal Reserve Chairman Jerome Powell last week reiterated his view that current interest rates are restrictive, which means he thinks they are holding back economic activity and should be reducing inflation. Looking through the corporate earnings reports for the last few weeks, that’s increasingly a difficult position to defend.

Through the end of last week, about 400 of the S&P 500’s companies reported quarterly earnings. It has been a season of strong reports. Aggregate earnings per share have beat expectations by about two percent, according to analysts at Bank of America. If we exclude Bristol Meyers Squib, which swung to a net loss for the quarter thanks to recently closed acquisitions, earnings beat expectations by five percent. Compared with a year ago, corporate earnings in the S&P 500 are up around five percent.

Bank of America says that 72 percent of the S&P 500 companies have reported earnings that beat expectations. Fifty-nine percent beat on sales. Half beat on both. Every sector but health care beat expectations, according to Bank of America.

Eight out of the 11 sectors of the S&P have collectively seen increases over last year’s profits, with health care, energy, and materials seeing declines. Consumer discretionary profits are up 24 percent compared with a year ago, and sales are up 5.7 percent. Communication services—which includes a lot of the streaming and social media companies—has seen profits jump 38.6 percent and sales rise seven percent.

Companies are also providing more upbeat guidance after coming into the year on a downbeat note. General Motors, for example, increased its profit outlook for the year by a half a billion dollars to between $12.5 billion and $14.5 billion.

More Profits, More Hiring, More Inflation

This is not what a restrictive monetary policy would be expected to produce. To the contrary, we appear to be going through the sort of earnings season you would expect with an accommodative monetary policy. At the very least, the first quarter’s earnings indicate that monetary policy is not all that restrictive.

Perhaps more importantly, rising profits are likely undermining monetary policy. Corporations swamped with demand and flush with profits expand investment and payrolls. In a healthy economy, this is a virtuous circle in which profits fuel demand that fuels profits. In an inflationary economy, this is a recipe for rising prices.

The stock market reflects this. The S&P 500 is up nearly nine percent year-to-date and is less than three percent off its all-time highs. Volatility, as measured by the VIX, is down at the boom-time level of around 14. The spread between junk bond yields and yields on Treasuries is the narrowest it has been in decades.

Each of these is both a sign that the economy is not being held back by monetary policy and a force that is actually loosening financial conditions. High stock market prices, lower cost of debt, and lower volatility all make it easier for companies to finance expansions. And they send a signal that there are more good times ahead, encouraging corporate managers to pursue the opportunities created by the looseness of financial conditions.

Corporations have been on a hiring spree. Even after taking into account the lower-than-expected April jobs number, the three month average for payroll expansion stands at 241,000 and the 12-month average at 242,000. This is also a sign of corporate confidence in the future as well as fuel for economic growth. Jobs are the lynchpin of retail sales just like profits are the lynchpin of economic growth. As long as jobs stay strong, sales will likely remain robust, which will boost profits, and therefore growth.

There’s been some concern lately about the jobs market emerging from those who watch the quits rate in the Job Openings and Labor Turnover Survey (JOLTS). This is back down to historically normal levels, prompting some to wonder if the labor market is softer than the high level of nonfarm payroll expansion and low unemployment suggest. We think there’s a better explanation: the mortgage rate lock-in effect. This makes moving to take a new job very expensive, holding back labor mobility. So the fact that the quits rate is near normal levels while housing mobility is dragged down by the lock-in effect is a sign of the tightness of the market.

Corporate profits are strong, consumer spending is still charging ahead, and the labor market is still very tight. No wonder Powell and his fellow Fed officials have been sending the message that rate cuts are not coming soon.