KEY DATA: GDP: 3.0% (Up from 2.6%); After Tax Profits (Over-Quarter): +1.3%/ ADP: +237,000; Large: 115,000/ HWOL: down 125,900
IN A NUTSHELL: “Solid growth in the spring has led to better job gains this summer.”
WHAT IT MEANS: The economy grew a little faster this spring than initially thought. GDP hit the 3% pace, led by a major upward revision to consumer spending. Households really did spend money; the government just didn’t count all of it. Unfortunately, income gains were sluggish and the declining savings rate raises questions whether people can continue shopping at the solid pace we saw in the spring. There were also some decent improvements in most categories of business investment, but the government slowed things down more than thought. After tax corporate profits grew moderately over the quarter, but were up a strong 8.6% from second quarter 2016. Companies are doing just fine and an additional moderate gain in the third quarter could lead to record profit levels.
The solid economy has created better than expected job gains and that may have continued in August. ADP estimates that firms added employees at a robust pace as large corporations went on a hiring binge. The large-firm gain was one of the largest on record, so don’t get too carried away with the forecast. The increases were in just about every industry, so this was a strong report.
Looking forward, even if we get a strong August jobs report, the increases may not to be sustainable. The Conference Board reported that online job ads continued to drop sharply in August. The declines were across all regions and in most occupations. In other words, firms everywhere are turning away from advertising job openings. That may be due to slowing demand or firms giving up trying to fill all the openings they have because of the labor shortage. Either way, it is hard to see how the economy can keep adding more than 200,000 jobs each month that the ADP numbers indicate.
MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape and firms are making plenty of money, so what is the problem? It is slow wage growth. And that raises the question: Do we need tax cuts or tax reform? Clearly, we don’t need tax cuts, which does little or nothing to long-term growth. Reform is needed, but it has to be directed in ways that improves efficiency, not adds simply to corporate profits. Firms have the money to spend and credit is readily available for firms of all sizes, so we don’t need “reform” that hypes short-term investment, especially since there is no reason to think it will lead to faster wage gains. Instead, reform needs to be structured in a way to provide the firms with the incentive to plan for the long-term. These decisions must be based on economic not tax gain factors. Will that happen? I doubt it. Instead, tax cuts will likely be sold as tax reform and that is not good for the economy or the budget. Meanwhile, investors will be focused on shorter-term issues, such as Friday’s jobs number. I still don’t see how firms are actually hiring so many workers, so I think Friday’s payroll gain number will disappoint. We shall see.