There is a twisted social madness that regularly bubbles up, but is currently bubbling up. Forget about the Dow Jones breaking the 30,000 point barrier (which prompted a Fortune bulletin to postulate “bet on the 40K Dow”). Or, more tellingly, the S&P 500’s 3,626.22 yesterday, its highest level on record.
The real news comes from the US Bureau of Economic Analysis (BEA), which released the first analysis of corporate earnings in the third quarter of 2020.
Given the rebound in GDP in the third quarter that brought this measure of the economy down to about ten percentage points from what it was before the second quarter crash, one would expect corporate profits to start. to come back.
They did more than that.
Here’s a chart showing quarterly corporate profits before tax, with the last point being the third quarter of 2020.
And here’s a second chart showing the same data but in constant 1982-1984 dollars to account for inflation.
In absolute dollars, pre-tax profits for the third quarter of 2020 were the highest on record. But even in constant dollars, they only fell to second place behind the first quarter of 2012.
After the economic catastrophe caused by the pandemic, after hundreds of billions of dollars were pumped into companies – and not counting actions of the Federal Reserve providing new loans and bond purchases – companies have fared well drawn. Overall profits fell 10.3% in the second quarter, but fell 27.1% in the third. Profits for the last quarter were 3.3% higher than the same period in 2019.
Then there are the federal statistics for ordinary people:
- Personal income for the third quarter fell 0.7%.
- Quarterly real personal disposable income (after inflation) – what’s left after tax – fell 0.8%.
- Real personal consumption expenditure increased 0.5%.
- Current consumer sentiment for November was largely flat compared to October, according to data from the University of Michigan. But the outlook on the economic outlook has fallen to its lowest level since August.
- Unemployment claims rose for the second week in a row. According to Oxford Analytics, âNew York and California, which account for nearly 20% of national employment, are particularly at risk among large state economies. “
When companies make more pre-tax profits, the gap between what gets taken and what gets spent grows. Has new consumer spending really gone up to this point, or have companies raised their prices? Has spending decreased with jobs being suspended or cut?
Businesses may be doing well, but tens of millions are not. Congress continues to do nothing, apparently having to focus on getting a budget deal to keep the government from shutting down. In the meantime, the following federal Covid-19 aid will end at the end of the year:
- Emergency Unemployment Insurance (UI) benefit which added 13 weeks of coverage to those in need
- Pandemic unemployment aid used by concert workers and independent contractors
- Moratorium on evictions
- State and local funding
- 2020 rebate checks not yet received
- Small Business Debt Relief
- Exclusion of employer payments for student loans
- Tax credits for family and sick leave for the self-employed
But corporate profits continue to rise inexorably. This shouldn’t come as a surprise.
There are the real factors in shutting down production and companies working on existing stocks, as Giacomo Santangelo, professor of economics at Seaton Hall, pointed out to me. Below is a graphic showing the size of the swing.
Who needs employees when you have product in the back?
At the same time, each financial crisis somehow manages to become an additional upward transfer of wealth. At least that’s not the downward transfer that so many people fear from a coming âsocialismâ that never happens.