54 Business The EconomistJuly 20th 2019
21of top ten contributors to the second quar-
ter’s profit crunch includes representatives
of Big Tech. Hardware and semiconductor
goliaths such as Apple and Intel are facing a
cyclical downturn in demand for their pro-
ducts. Trade spats exacerbate it. So too has
Mr Trump’s decision on national-security
grounds to impose sanctions on Huawei,
China’s tech champion, which has upend-
ed global supply chains. Some internet
firms are sputtering. Netflix’s share price
lost 12% in after-hours trading on July 17th,
when the streaming giant reported the first
drop in American subscribers since 2011.
Big trouble at a few massive—and mas-
sively profitable—tech firms may be drag-
ging down average earnings. As Mr Kostin
points out, some tech titans may see pro-
fits squeezed by 10% whereas the median
technology firm can expect a rise in earn-
ings per share of perhaps 3%. Some big
firms, like Microsoft and Amazon, contin-
ue to thrive. Similarly, the aggregate de-
cline in second-quarter earnings hides the
fact that the median American company
should see profit growth of 4%.
The good times, on this view, are not
quite over. “The headwinds will abate by
2020,” predicts Mr Palfrey. Many American
bosses agree. Unless the Sino-American ta-
riff tiffs turn into a full-blown trade war,
they think, companies can handle the chal-
lenges. The Federal Reserve has recently
turned dovish, partly in response to Mr
Trump’s hawkishness on trade. It may cut
interest rates, which could extend the eco-nomic expansion further.
Not everyone accepts this view. Morgan
Stanley expects profits across the metals
and mining industries to decline, for ex-
ample. The bank is also bearish on tech,
where the “breadth of the expected nega-
tive results is stunning”. Mr Wilson, who
was among the first to foresee the current
decline in profits, believes that earnings
have not yet hit the bottom. “The picture is
getting worse, not better,” he warns.
Unless America’s expansion enters Aus-
tralia’s territory of 20-plus years of contin-
uous gdp growth, the boost to profits from
Mr Trump’s tax cuts came nearer the end
than the beginning. That may have created
excesses. As a share of gdp, corporate debt
is nearly where it was before the subprime
bubble burst in 2008. Inventories are
building up across the economy. Firms
must absorb higher depreciation costs
from a tax-fuelled splurge of capital spend-
ing. All this can weigh on profitability.
The quarterly financial results unveiled
this week by several big banks bolster the
case for cautious optimism. A boom in
credit cards and mortgages pushed profits
up at JPMorgan Chase, Citigroup and Wells
Fargo. This implies that, as Mr Dimon also
said this week, “the consumer in the Un-
ited States is doing fine.” This will be cold
comfort to industrial firms and other busi-
ness-facing companies whose margins are
shrinking. Given the sheer length of Amer-
ica’s record economic expansion, however,
it really is not that bad. 7Boom-timebluesSources:Bloomberg;BankofEngland; FactSet; Datastream from RefinitivS&P 500 stockmarket indices
January 1st 2018=100S&P 500 estimated earnings by sector
Q2 2019, % changeona yearearlier2018 20196080100120140CompositeEnergyFinancialsInformation technology-20 -15 -10 -5 0 5
Health care
Utilities
Commercial services
Property
Financials
Industrials
Consumer staples
Composite
Consumer discretionary
Energy
Information technology
MaterialsS&P 500 aggregate annual earningspershare
$2007 09 11 13 15 17 20050100150200United States, private non-financial corporate
debt as % of GDP2007 09 11 13 15 1718606570FORECAST 75T
he sceneis becoming familiar: a Face-
book executive is hauled before Con-
gress in Washington, dc; a public grilling
ensues. At least on July 16th and 17th Ameri-
can lawmakers looked better prepared
than they were a year ago when they dis-
played little idea of Facebook’s business
during hearings over its failure to stop a
rogue consultancy from harvesting data on
50m users without permission. This time
David Marcus fielded mostly sensible
questions about the social network’s na-
scent cryptocurrency project, Libra, which
he heads. Would transaction data be mined
for valuable spending patterns? How will
Facebook make money from Libra, which is
to be governed by an independent body
based in Switzerland?
Mr Marcus offered reasonable answers.
User consent will be required to mine tran-
saction data; money will come from adver-
tisers, happy to pay to gain access to con-
sumers more willing to part with their
money thanks to easier online payments.
The big question on everybody’s mind was
different, however: why on Earth would
scandal-plagued Facebook launch a global
financial instrument at all?
The query is all the more relevant in
light of a decision days earlier by the Feder-
al Trade Commission to fine the company
$5bn for its recent misuse of user data. If
approved by the Department of Justice, as
looks likely, the penalty will be the largest
that the American government has ever
meted out to a technology company (the eu
has been harsher, see chart on next page).
Facebook seems eager to convince gov-
ernments that, despite piles of evidence to
the contrary, it can be trusted. Mark Zuck-
erberg, Facebook’s boss, has called for more
regulation of Big Tech, including his firm.
On Capitol Hill Mr Marcus promised that
Libra, and the division of Facebook which
is meant to monetise it, Calibra, would not
launch until the concerns of American law-
makers have been allayed. It now asks for
permission rather than forgiveness, Mr
Marcus appeared to be saying, not the other
way around as in its youth.
Facebook’s new, mature face plays well
with investors. After a year of scandal and
abysmal press, its share price is just shy of
record highs. It gained more than 1% on the
news of the latest fine, which had already
been priced in thanks to astute telegraph-
ing earlier this year—a sign, perhaps, of a
good working relationship with the Ameri-The social network says it will behave
better from now on. PromiseFacebookVolte-face