The Meltdown of U.S. Corporate Profits
One of the biggest changes brought by Trump’s administration since the 2016 election was the reduction in the U.S. corporate tax. It was one of the promises made in the 2016 election campaign, and Trump delivered.
In 2017, the Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%. The idea was to stimulate U.S. corporations to bring home their dollars earned abroad. For instance, corporations like Google, Apple, or Facebook kept their revenue earned outside of the United States so as to avoid the high tax rate.
The move did matter for the currency market at that point in time. The USD strengthened eventually on the back of corporations repatriating their foreign profits. But things changed recently.
Continued Decline in U.S. Corporate Profits
The first quarter of the year saw the U.S. corporate profits declining by a staggering $276 billion. A couple of things are worth mentioning here – this was before the pandemic hit the Western world, and by U.S. corporates, we do not mean just the tech companies mentioned earlier, but the data refers to all corporations from all sectors.
The trend continued in the second quarter of the year. American corporations’ profit declined by another $209 billion, having a profit margin level of only 9.4% of GDP – a level not seen since the 2008-2009 Great Financial Crisis.
A curious thing is that U.S. financial corporations actually saw their profits increasing in the second quarter, while the biggest negative impact came from domestic non-financial corporations and their activities in the rest of the world.
Why are such metrics important? It is all about numbers.
The idea of a corporate tax rate reduction was to stimulate corporations to invest more, earn more, and pay less in taxes. But a decline in the corporate profits reduces the positive impact expected by the tax rate cut.
The coronavirus-created recession had a strong impact on the world’s economies. Not all corporations earn online or offer Internet-related services to benefit from the change in consumer behavior. Think of airlines, cruisers, the tourism industry in general, hotels, oil-producing and refining companies, and so on.
A decline in overall profitability is a normal sign during recessions. What is surprising here is that the decline already started with the first quarter of the year. Also, the fiscal stimulus provided by Trump’s administration vanished away as quickly as it came.
Once again, it reflects how difficult it is to prepare and execute a business plan. Solid businesses with tens of years of solid gains may simply run out of customers.
This is why macroeconomics has a crucial role in trading/investing. The bigger picture helps investors choose the right path.