The Economist - USA (2019-07-20)

52 TheEconomistJuly 20th 2019

1

“I

t’s notthat bad,” remarked Jamie Di-

mon, boss of JP Morgan Chase, of the

global economy on July 16th. But, Wall

Street’s favourite banker had to concede,

business sentiment “is a little bit worse”.

Prospects for American companies have

indeed dimmed. Analysts expect earnings

of the biggest among them, which have just

begun reporting their latest set of results,

to have declined in the second quarter. This

would mark two consecutive quarters of

falling profits, the first such “earnings re-

cession” since 2016. Coming just as the cur-

rent economic expansion makes history as

America’s longest ever, it raises the pros-

pect of a long boom running out of steam.

Bosses are getting twitchy.

America Inc has enjoyed an extraordi-

narily good run since the country rebound-

ed from the global financial crisis of

2008-09. The economy has grown, infla-

tion has been low and interest rates rock-

bottom. Despite unemployment hovering

below 5% wage pressures have been mod-

est. All told, annualised corporate profits

exceeded $2trn last quarter, nearly double

the level a decade ago. President Donald

Trump’s tax reform cut the corporate tax

rate from 35% to 21%. This and his deregu-

latory efforts have freed up capital. Compa-

nies have used the windfall to buy back

shares—reducing the amount of stock and

superficially boosting earnings per share.

The s&p500, Dow Jones Industrial Average

and Nasdaq Composite, three leading share

indices, hit record highs on July 15th.

Today the mood in boardrooms is less

ebullient. The latest survey by the Business

Roundtable, a conclave of bosses (chaired

by Mr Dimon), put confidence higher than

the historical average and well above the

level which would signal a recession. But it

has slipped. The National Federation of In-

dependent Business observes a similar de-

cline in optimism among bosses of small

and medium-size enterprises. Nearly four-

fifths of s&p500 firms that have issued

guidance on financial performance for the

latest quarter have indicated that earnings

per share will fall year on year.

Analysts’ forecasts reflect these senti-

ments. Profits in six out of eleven big in-

dustries may have declined from April to

June compared with a year earlier (see

chart on later page). FactSet, a research

firm, estimates an average drop of 2.8% for

s&p500 earnings, on top of a 0.3% dip the

quarter before. Observers—and executives

themselves—see three reasons for the

darkening outlook.

The most prominent is Mr Trump’s

trade war with China. Doug McMillon, boss

of Walmart, has warned that tariffs will

lead to higher costs for the retail giant,

which sells plenty of Chinese-made goods.

David Herring, head of the National Pork

Producers Council, this week told Congress

that the lobby group’s members were suf-

fering from Chinese retaliatory tariffs on

American pork. Despite his friendly en-

counter with China’s president, Xi Jinping,

at a g20 summit in late June, Mr Trump

threatened this week to impose fresh ta-

Corporate earnings

Earnings reprieve

NEW YORK

Profits are down in America Inc. Is it time to worry?

Business

53 Bartleby:Academyrewards

54 Facebook’svolte-face

55 Dilutinghomeopaths’ profits

55 Bayer’sremorse

56 Brandsandprotests

57 Schumpeter: Firefox and friends

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