The Economy…
Weak economic activity in the first quarter was confirmed by the initial estimate of real GDP, which showed a meager 0.2 percent annualized growth rate. As we noted in April (https://aier.org/bcm) we expect consumers to lead a reacceleration in growth in the second quarter. A healthy corporate sector, based on decent top-line revenue gains, generally high profit margins, strong cash flow, and solid balance sheets, should help support the rebound through increased investment, more hiring, and faster wage growth.
Our business-cycle leading indicators remained at the neutral 50 percent level for the third month, consistent with other mixed data on the economy. However, our cyclical score at well above neutral suggests the odds of a recession remain modest.
…Inflation…
AIER’s inflationary pressure scorecard suggests continued easing as nine of 23 indicators point to rising pressure while 12 showed declines. Rebounding energy prices gained for the second straight month in March. Food costs decreased for the first time since July 2014. Food is the only component of the CPI that fell in March. Overall, CPI growth remains sluggish.
…Policy…
Federal Reserve policy makers kept short-term interest rates unchanged at their April meeting and sent no new signals about when they may raise benchmark rates. Weaker-than-expected economic data for the first quarter suggest that increases may not come until later in the year.
Federal Reserve policy makers kept short-term interest rates unchanged at their April meeting and sent no new signals about when they may raise benchmark rates. Weaker-than-expected economic data for the first quarter suggest that increases may not come until later in the year.
The current U.S. corporate tax system discourages investing foreign profits domestically and does not produce much revenue. Two contrasting ways to reform it—a territorial tax system and a global tax system—have supporters in Washington. But electoral politics may impede progress on either one.
…Investing
High profit margins, strong cash flow, and solid balance sheets have helped keep corporate bond yield spreads over Treasury securities close to long-term averages, with the possibility of additional narrowing as the economy improves.
Rising profit rates have helped companies increase earnings faster than sales and typically indicate corporate strength. But comparatively strong profit margins also represent a source of risk should labor cost pressures escalate. Finding offsetting expense reductions, improving productivity or passing along cost increases may be critical for companies trying to maintain high margins.