Simple Econ with Bob Gray. First Quarter 2018 Corporate Profits.
Simple Econ with Bob Gray. As promised, I'm back for a few minutes to review the first quarter of 2018's corporate profits. Take a quick look at where the U.S. Economy currently stands and what we can expect going forward. Let's get right into it.
Hello. This is SimpleEcon and I am Bob Gray. As promised, I am back for a few minutes to review the first quarter of 2018's corporate profits, take a quick look at where the US economy currently stands and what we can expect going forward. Let's get right into it.
Overall, the US economy is performing quite well. But it is hard to tell this most of the time as there's far more noise out there today than common sense. The talking heads need to fill time to separate the commercials, so they often dwell on a single data point at a specific date and time or point in time. However, the economy and markets are not made up of single data points, but millions of global data points, decisions, and trades made globally, along with computer algorithm that turn the data into overall trends. And it's overall trends that must be paid attention to. The rest is just noise that sometimes can and most likely will drive you crazy.
On top of that, you add the proliferation of what I will call the prattling purveyors of pessimism. They have also in the past been referred to as "but monkeys". I'm talking about those who use the qualifying word but with everything they say, as they want you to carry the burden of fear everywhere you go. You can look and listen for them everywhere. They say things like the US economy is currently growing at its fastest pace in a decade, but it won't last forever. Well, guess what? Nothing lasts forever. Right now I would like to focus on just a few of the key trends that are important to understanding what is going on in the US and what it says about the most likely near-term future.
First, the economy is growing at a very strong pace. The Advance Report of Real Quarter over Quarter GDP for the second quarter of 2018 came in at a 4.1% growth rate. That is a great quarter. The second quarter was also the eighth straight quarter of year over year or comparable real GDP growth. What is fueling the growth? Lower tax rates and deregulation are the two largest drivers of the growth as increased business profits aid GDP in a number of ways.
Business investment grew at a 7.3% annual pace for the quarter, which is about three times the average since the last recession ended. The business tax cuts, along with the immediate expensing of capital items have made it more profitable for businesses to invest in the United States. Business investment increases productivity, which in turn increases wages and standard of living. The pace of stronger growth continues while inflation has remained moderate at 2.3%. Consumer spending rose by 4% due to higher employment, wage increases, and tax cuts, which combined, puts more money in their pockets. Net exports increased 1.1%. Some say it is due to increased exports to get ahead of potential upcoming tariffs.
But at the same time, inventories reduced GDP in the last quarter about the same 1.1%, which should increase it in the third quarter as businesses move to build and restock low and sold out inventories. Core real GDP, which is also called final sales to private domestic purchasers grew at a 4.3% pace which is even greater than the GDP growth and is up 3.2% in the past year. This indicates that the underlying economy is even stronger.
Initial employment claims for the first weeks in July remained at record lows, indicating no adverse effects yet from the ongoing tariff negotiations. The consumer confidence index for this July is 127.4, another leading indicator of strong economic growth. There is no doubt that the US economy is the strongest it has been in a decade.
Now to the stock markets. We all know that markets are fueled by profits. The reason to invest in stocks is to share in the profits and growth of the companies whose shares you purchase. First of all, take a look at the S&P 500 which is a solid indicator of what has been happening in the markets. Actual year over year quarter one 2018 profits were up 25% and actual revenue growth was up 8.4%. In moving to the second quarter of 2018, with a little over half of the S&P 500 having reported to date, the blended actual reported and estimated profits for the rest yet to report is indicating overall year over year quarterly profit growth of 22.6%, with blended revenue growth at 8.7%.
Moving to market results, we all know that the markets have been flat over the last few months. This is not uncommon in a growing market. As you can see, this is at least the sixth time this has happened over the past nine plus years of this extended up market. Stair stepping up is normal. Markets pause to reflect, look at the different segments of the economy, look for the next market leadership, rotate stocks or segments, and then start moving up again if the potential is there. The markets are still on an uptrend, and based on whose metrics that you want to use, it is still undervalued by around 8 to 10%. And you can see the similarity in the Dow Jones Industrial Average, the NASDAQ and the Russell 2000 and the Vector Vest Composite, an average of around 7,800 symbols.
Finally, a look at the VIX or Volatility Index. The average volatility since 2004 has been around 18.4. Currently the index has been hanging around 14. I expect it to continue to bounce around higher than last year's very low levels due to the ongoing tariff negotiations, political instability during the run-up to the midterm elections, and some disruptions in the technology area that have started to pop up recently. However, in the long run, it will not change the market leadership that technology has provided for many years.
Globally, it is apparent, looking at some random international stock exchange indexes, that the last 12 months have been good around the world. The global theme for the past several years has been one of global convergence as growth was readily apparent everywhere. Now it appears to be turning to one of global divergence, while the US still has plenty of opportunity for growth. However, indicators in Europe are starting to show growth slowing due to debt, regulations and demographics. China's economic indicators are also showing an economy that is starting to grow at a much slower pace. North Korea, Argentina, and Venezuela are just a few countries that are failing or having rough economic times. Iran is struggling economically and their currency value has been declining since the first of the year, and has lost 20% of its value just in the last few weeks. The Iranian rial is now trading on the black market at 119,000 rials to one US dollar.
Going forward, expect continued positive moves on the US economy. The ISM surveys for June were strong indicators of further growth as the manufacturing index was 60.2 and the non-manufacturing or the service index was at 59.1. Expect similar results this week when the July indexes are reported. The jobs report due on April 3rd should be another strong indicator of continued employment and economic growth. The Federal Reserve Board meets this week and will release their current view of the economy. They are not expected to raise rates this week, however. They are expected to raise the Fed funds rate from 1.75 to 2% at their September meeting and then one more time this year, most likely in December. All is consistent with strong economic growth.
Finally, contrary to what many believe, it is all of us that make the US economy grow and has made it the greatest economic engine in the world. When Americans are both allowed and encouraged to facilitate dynamic growth, our individual and collaborative spirit, ingenuity, entrepreneurial spirit and energy makes anything possible. And it is up to us, and only us, to keep it moving forward.
Thanks for taking a few minutes of your time to watch this short video. I will be back when something changes to explain the what and why and how it affects us all going forward. In the meantime, please be well.