US Economy: Thanks for the Jobs. Washington’s politicians like to take credit for creating jobs. Washington’s macroeconomic policymakers like to claim that their policies have moderated the business cycle. I continue to marvel at how well our economy performs despite Washington’s meddling. In our economy, which remains relatively competitive and entrepreneurial, profitable businesses create jobs. Profitable businesses have the resources to grow by hiring more employees and expanding capacity. In our capitalist economy, businesses have a tendency to increase their profits. Washington’s policies can either slow down this natural process or move out of the way and let businesses do what they do best, i.e., grow their businesses.
In this context, Trump’s proposal to cut corporate tax rates and reduce government regulation on business is to be welcomed. We will soon find out whether the former may be harder to accomplish than the latter. Congress is in the midst of the messy process of passing major tax reform legislation that includes corporate tax cuts. Odds are, it will succeed. Large corporations won’t benefit much because they’ve been gaming the tax code to lower their effective tax rate for many years. Smaller corporations, however, should benefit significantly. That’s important, because ADP data show that smaller companies tend to do most of the hiring in the US. Consider the following:
(1) Small business owners survey. Last week, the National Federation of Independent Business released its monthly survey of small business owners. Debbie and I track the less volatile six-month averages of the percentages of them who say that their most important problem is one of the following: poor sales, taxes, government regulation, or credit conditions (Fig. 1). From October 2008 through July 2012, poor sales was the most frequent response in the survey. From 2014 through early 2016, it was a virtual tie between taxes and regulation.
Over the past 12 months through October, the percentage saying that regulation is the biggest problem dropped from 19.5% to 15.7% (Fig. 2). This percentage rose during the late 1980s through mid-1990s. It then mostly fell through 2008. It rose sharply under the Obama administration.
So far, small businesses are confirming that the Trump administration is providing them with regulatory relief. Taxes now show up in the survey as the most frequently cited problem faced by small business. If Congress cuts corporate tax rates, then there won’t be much for small business owners to complain about.
Actually, the NFIB survey shows that the latest problem for small business owners is finding workers. During October, 35.0% of them said that they have job openings, while 52.0% said that they have found few or no qualified applicants for those openings (Fig. 3).
The Small Business Optimism Index soared after Trump was elected, and continues to fluctuate around this year’s cyclical high, which matches the optimism levels of 2003-04 (Fig. 4). It could match or exceed the record high of July 1983 if corporate taxes are cut.
(2) ADP payrolls. Small and medium companies do most of the hiring in our economy. That makes sense, since they aspire to grow their businesses into big ones. ADP has compiled private-sector payroll employment data since the start of 2005 for small (1-49 employees), medium (50-499), and large (over 500) firms. Since then through October of this year, small and medium firms have hired 6.5 million and 5.7 million workers, respectively, while large firms have added just 1.7 million to their payrolls (Fig. 5). During October, small and medium companies accounted for 41.1% and 36.0% of private-sector employment, while large ones accounted for just 22.9% (Fig. 6).
(3) Forward revenues and earnings. S&P 600 SmallCap forward revenues rose to a record high during the 11/9 week (Fig. 7). Industry analysts are forecasting revenues growth of 0.6% this year, 6.1% during 2018, and 5.5% during 2019. Not surprisingly, S&P 600 forward earnings was also at a record high during the 11/9 week. Industry analysts are estimating earnings growth of 4.9%, 18.3%, and 14.1% this year and over the next two years.
Strategy: Thanks for Revenues & Earnings. Joe reports that S&P 500 revenues and earnings data were released last week. On balance, there is much to be thankful for, thank goodness, since Thanksgiving is around the corner. Let’s review the cornucopia of news we should be thankful to receive:
(1) Revenues. S&P 500 revenues per share rose 6.0% y/y to a record high during Q3 (Fig. 8 and Fig. 9). The growth rate in this series on an aggregate (rather than per-share) basis is highly correlated with the comparable growth rate in US manufacturing and trade sales, which was up 6.4% during September. Growth rebounded from the energy-led revenue recession during 2015 (Fig. 10 and Fig. 11).
(2) Earnings & margins. S&P 500 operating earnings per share (Thomson Reuters data) rose 6.8% during Q3 to a record high (Fig. 12 and Fig. 13). The operating profit margin per share remained at a record high of 10.8% during Q3.
(3) Forward revenues & earnings. The weekly time series for S&P 500 forward revenues is a coincident indicator of S&P 500 quarterly revenues (Fig. 14). The former has been climbing on a steep vertical uptrend in record-high territory since early 2016 through the 11/9 week.
S&P 500 forward earnings has been following the same trajectory as forward revenues. The former is usually an excellent year-ahead leading indicator of actual four-quarter trailing operating earnings (Fig. 15). The only exception is that forward earnings never anticipates recessions.
(4) Sectors. Joe reports the following performance derby for the y/y operating earnings growth rates of the S&P 500 sectors (based on Thomson Reuters data): Energy (154.5%), Information Technology (20.5), S&P 500 (6.8), Health Care (6.1), Consumer Discretionary (6.0), Consumer Staples (4.7), Industrials (0.0), Telecom Services (-0.6), Real Estate (-0.9), Utilities (-5.7), Financials (-6.9), and Materials (-11.4). All in all, Q3’s overall performance would have been better but for the hit that property and casualty insurance companies (in the Financials sector) took from a couple of nasty hurricanes.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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