Joseph G. Carson

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The profits puzzle is no more. A recent report by the Bureau of Economic Analysis (BEA) stated that the primary reason that the GDP measure of operating profits does not show the "large run-up in profits" in other "popular measures" (e.g., S&P profits) is because it does not include capital gains, while other measures do. And it’s happening again.

BEA periodically publishes a report that provides a "conceptual bridge" to gauge the differences between the growth rates of the GDP measure of profits and S&P 500 reported profits.

According to BEA there are several accounting principles that affect measures of receipts and expenses and their timing, and "comparisons can be meaningful" with GDP & S&P 500 operating profits only if adjustments are made for the differences.

The adjustments fall into two broad categories: capital gains (net of losses) and bad debt expenses. Trading gains and losses are considered part of S&P 500 operating profits, but not part of GDP profits since they reflect a change (gain or loss) in the valuation of existing asset. Also, bad debt expenses are included in the GDP measure of profits since these reflect an adjustment to corporate balance sheet, while the write-down of existing assets are excluded from S&P 500 profits.

In past reports, BEA has published a series on GDP profits (after tax) and then an adjusted GDP profit series, netting out the bad debt expenses and adding back the capital gains (net of losses) in order to make the GDP profit series more aligned with the financial accounting basis for S&P profits.

According to the data published by BEA, capital gains (net of losses) run about 3 times larger than bad debt expenses during periods of economic growth and rising asset markets. But during periods slow growth or recession and falling risk markets capital gains (net of losses) can run equal to or even below bad debt expenses. Also, capital gains (net of losses) can ran as high as 30% of GDP measure of profits during rising risk markets.

Yet, it’s the "growth rates" that BEA believes offer the most meaningful insight when assessing the differences between adjusted GDP and S&P profits measures. And the differences in growth rates can be quite substantial, and in some cases the profit series move in opposite directions.

For example, in 2000 during the peak of tech bubble S&P operating earnings showed a double-digit gain in earnings, while the adjusted GDP measure of profits posted a decline. And in 2008 (financial crisis) the S&P operating profit declines was substantially larger than the GDP adjusted measure.

A senior BEA official said the next reconciliation report on GDP and S&P 500 profits would not be released until late 2020. Nevertheless, its already been well documented that capital gains are the key "wedge" between GDP and S&P profits and represent the most likely source of 2014 to 2019 outperformance of S&P 500 operating earnings. And its also important to note that while capital gains provide an extra boost to the growth rate of S&P 500 operating profits during rising risk markets they also represent a huge drag during down markets.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The profits puzzle is no more. A recent report by the Bureau of Economic Analysis (BEA) stated that the primary reason that the GDP measure of operating profits does not show the "large run-up in profits" in other "popular measures" [...]

"Solving" The Profits Puzzle

Charles Steindel

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The Philadelphia Federal Reserve Bank's estimates of state coincident activity for August show some increased dispersion and, overall, some signs of softening in economic growth. Over the last 12 months, 29 states show increases in their index in the 2 to 4 percent range—down from counts over 30 in that middle group in recent months. 7 states were at 4 percent or higher; 14 were lower than 2 percent, with Michigan reporting a decline. Western states were again generally stronger than the east; with Nevada at the top, with a 4.7 percent gain. Two large Eastern states—Georgia and Florida—did report growth of 3.5 percent. The weaker states tended to be in the middle portion of the nation, though New York was also in that group.

Over the three months ending in August, 24 states had gains of less than .5 percent, with 45 declines, with Kentucky's index down nearly 1 percent over that period. 14 states, though, had gains of 1 percent or more; these were in a wide swath literally from Maine to California (and with Alabama in the group just touching a southern border). Montana was again the state with the highest growth in this category. Its 2.48 percent increase was virtually the same as the preliminary 2.49 percent rise in its index reported for the April-July period

Montana also, (again) had the largest one-month increase in the initial results for August. 8 states saw declines (the initial report for July had 12 in this category), with drops of 2 percent or more in Delaware, Wyoming, and Kentucky.

The upshot from this survey is comparable to other recent reports. Growth is continuing, but with a fair number of states seeing cooling-off, and fewer showing extremely rapid growth. In the very largest states, Texas, California, and Florida still report strong numbers, though none of them were in the very top group; however, the figures from New York have been soft.
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The Philadelphia Federal Reserve Bank's estimates of state coincident activity for August show some increased dispersion and, overall, some signs of softening in economic growth. Over the last 12 months, 29 states show increases in [...]

State Coincident Indexes

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Operating profits for the overall economy have been essentially flat since 2014. Yet, during the same 5-year period operating profits for the S&P 500 companies are estimated to be up by a third.

Taken at face value, the profits data paints a picture of rising earnings for the companies that comprise the S&P 500 index while profits for millions of other firms are stagnant, if not contracting. How can that be? Are the earnings of S&P 500 companies "real" or are accounting gimmicks inflating them?

According to corporate profit data from the Bureau of Economic Analysis (BEA) operating profits for all US corporations (large and small and public and private) totaled $2.113 trillion in Q2 2019 essentially unchanged from the 2014 full year profit figure of $2.120 trillion.

Over the same 5-year period, the operating profits of S&P 500 companies have increased from $1.004 trillion in 2014 to an annualized estimated figure of $1.333 trillion in Q2 2019, and increase of 33%.

Both estimates of profits calculate earnings as the difference between receipts and expenses. Yet, the profit reports are based on two different accounting frameworks, financial and tax accounting.

Companies' use financial accounting to report their results, while tax accounting results is the primary source for the GDP measure of profits. As a result, differences between the two profit measures can result from the timing of when receipts and expenses are recorded, as well of what is included and not included in receipts and expenses.

For example, the GDP gauge of operating profits adjusts for misreported and/or overstated measures of current income. Income or losses derived from capital sales are not part of the GDP measure of profits because they reflect the sale of existing assets and GDP is only measuring the profits from current production, and not the change in the valuation of items that were produced in previous periods.

Yet, S&P 500 profits, which are based on a financial accounting basis, do include income derived from capital sales, and other financial flows and adjustments as well.

At the currently reported levels for Q2 2019 S&P 500 profits amount to a record 63% of overall operating profits for all US companies. In the past 30 years there is only one other period when the share of S&P 500 earnings topped the 60% level. That occurred in the late 1990s when the large gain in reported S&P 500 profits was largely driven by capital gain income. And, during that period the GDP measure of operating profits followed a similar pattern to that of 2014 to 2019---flat to slightly down.

Corporate profits are an important measure of the economy's overall performance as well as benchmark for the financial health of the corporate sector. The overall profit data raises questions about the general health of corporate sector. Moreover, the relative surge in S&P 500 earnings appears to be driven not by core operations and the experience of the late 1990s would argue that they unsustainable in their current form.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Operating profits for the overall economy have been essentially flat since 2014. Yet, during the same 5-year period operating profits for the S&P 500 companies are estimated to be up by a third. Taken at face value, the profits data [...]

The Profits Puzzle

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State labor markets were mixed in August. Five states experienced statistically significant increases in payroll employment, with 3 (Arizona, Georgia and Kansas) .4 percent or higher. California had the largest numerical gain, but the 34,500 increase was a fairly small .2 percent in light of the number of jobs in the state. On the negative side, Oklahoma's 8,700 loss (.5 percent) was the only one deemed statistically significant, but 15 other states report declines in payrolls (Indiana's 8,500 loss was nearly as large as Oklahoma's. It's a bit surprising that a loss of this magnitude--.3%--wasn't seen as statistically notable). 12-month job gains have also cooled off. Nevada is now the only state with a 3 handle on its percentage gain (3.0, to be exact). Nineteen states, mainly in the Middle West and Northeast, report job growth of 1.0 percent or less over the last 12 months. New York, Pennsylvania, Ohio, and Michigan are in the group (the 12-month point increases in Pennsylvania, Ohio, and Michigan were not statistically significant). It remains the case that Western states are the leaders in job growth; Alabama and Florida are the only states in the East that have seen payrolls expand at 2 percent or higher. On the positive side, for the first time in some while, all states report some growth in jobs over the last year.

Some divergence has recently developed between the national job figures and those reported at the state level. Over the last 6 months the national count has risen by 898 thousand; the sum of the state figure has a gain of 1.056 million. Divergences of even larger magnitude are not uncommon; the currently reported data shows an increase of 1.296 million for the national total over the 6 months ending in September 2018, while the sum of the states figure is shown as rising only 713 thousand in that period.

The household survey figures show that low unemployment rates are common across the nation. Alaska remains the great high side outlier, with a rate of 6.2 percent, but Mississippi and Arizona had rates of 5 percent or higher. 12 states had unemployment rates under 3 percent, with Vermont's rate remaining an astonishing 2.1 percent. Puerto Rico's rate fell .4 percentage points to 7.7 percent, and the island's job count, though down slightly from July, was above August 2018.
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State labor markets were mixed in August. Five states experienced statistically significant increases in payroll employment, with 3 (Arizona, Georgia and Kansas) .4 percent or higher. California had the largest numerical gain, but the [...]

State Labor Markets in August

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The August report from the Institute of Supply Management on the manufacturing sector showed a sharp drop in overall activity, with very few firms reporting gains in new orders and production. The manufacturer's purchasing managers' index has one of the best records of foreshadowing recession so the drop in the composite index in August, although its only for a single month, highlights how vulnerable the overall economy is at the present time.

In August, the composite index dropped 2.1 percentage points to 49.1, falling below the all-important threshold of 50 (the so-called dividing line between growth and contraction) for the first time since 2016.

Four of the five components that comprise the overall index dropped in August, led by declines in employment, production and new orders. The only component that rose in the month was inventories. That's a bad mix, as it signals more weakness in manufacturing in coming months.

The new orders index at 47.2, dropping below 50 and also below the composite index of 49.1 is a troubling development as the orders index usually offers insight in the future direction of the overall index.

In August, only three industries out of 18 manufacturing industries reported gains in new orders, and only 4 out of 18 reported gains in production. Combined, these numbers on firms reporting gains in orders and production match the lowest of the current cycle and also are marginally below the levels that were in place in the fall of 2009.

To be fair, the signal from the purchasing managers survey has to be sustained over a span of several months for it to confirm a sharp slowdown or an outright decline in economic activity. Yet, the clock is ticking and the outcome of the US/China trade talks could easily tip scale one way or the other, but in the meantime the key takeaway from the August purchasing managers survey is that a number of companies earnings report will be weaker than expected for Q3.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The August report from the Institute of Supply Management on the manufacturing sector showed a sharp drop in overall activity, with very few firms reporting gains in new orders and production. The manufacturer's purchasing managers' [...]

US Purchasing Managers "Recession" Warning---- Few Firms Report Gains in Orders and Production

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

Resilient US economy is pushing up longer-term inflation expectations and interest rates

Positive US economic data surprises leading to upward adjustment of interest rate expectations

Recent aggressive policy easing in China has given a massive boost to equity prices

FOMC expects much more easing now than in June

US is clear world leader in business capital spending on artificial intelligence

Blue Chip forecasters expect US to lead aggressive policy rate cuts over coming year—apart from Japan

Ratio of job openings to the number unemployed in the US now below pre-pandemic level

U.S. layoffs not showing as much cooling in labor markets as unemployment rate

While goods prices have moderated, service price inflation remains elevated and sticky

Since Jan 2023, BCEI US outlook has improved, worsened for Japan and the euro area

Persistent negative US economic surprises leading to big rate-cut expectations

Germany is Euro area weakling

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With price stability as a key mandate, the Federal Reserve bears a significant responsibility to guarantee that the targeted price statistics accurately reflect people's experiences and are not influenced by political or statistical manipulation. However, the Fed's price targeting regime has become misleading and unbalanced since the price measure it targets has become less relevant to "actual" inflation. The Fed nowadays lacks a "Greenspan," or an individual who is both an expert in economic statistics and methodology and possesses the political power and influence to challenge the accuracy of published statistics or request their review. The matter of accurate price measurement is not just academic; it has real economic and financial effects.

Years ago, the Price Statistic Review Committee (PSRC), a group of academics, economists and statisticians, stated that, “If a satisfactory rent index for units comparable to those that are owner-occupied can be developed" then the committee recommends that BLS to use this approach for house prices and related expenses.

The General Accounting Office (GAO), which released a comprehensive report on how housing costs are measured in inflation metrics, made a similar suggestion. The GAO stated, "Most owner-occupied housing units differ significantly from many rental units. To apply rental equivalence in the CPI, a sufficient number of rental units must be identified that are comparable to owner-occupied units in terms of size, location, and quality, allowing the BLS to create a sample that accurately reflects owner-occupied houses."

In 1983, based on recommendations from the PSRC, GAO and others, the Bureau of Labor Statistics introduced the owners' rental equivalence method to estimate housing costs of owner-occupied homes. This estimation procedure continued until 1998, when the BLS announced that it had to discontinue the owner-sample due to an insufficient sample of owner-housing units. Moving forward, they decided to link the rent estimates for owners' rent to the other rent series. Neither the PSRC nor the GAO provided any comments.

The owners-occupied rent series constitutes roughly fifteen percent of the Fed's preferred price target, the personal consumption expenditure deflator (PCE). Combined with the thirty percent of the PCE that individuals do not buy, nearly half of the PCE deflator reflects an inflation rate derived from administered and non-market prices or imputations. How can this be regarded as a reliable or accurate measure of actual inflation people experience?

Price data should represent "actual" inflation, not a statistical distortion. Considering its essential role in shaping both monetary and fiscal policy, it is crucial for the price data to be accurate, relevant, and objective. The general public benefits from "actual" sustainable low inflation. But who gains when inflation might be understated, or its cyclical fluctuations are dampened or eliminated due to a new statistical method?

Over the past sixteen years, from 1998 to 2024, the average S&P 500 P/E ratio was 26.7. In contrast, during the preceding fifteen years, from 1983 to 1998, it averaged 15. Is this just a coincidence, or could the alteration in inflation estimation for housing costs, combined with the Fed's emphasis on an inflation measure representing only half of the actual inflation rate experienced by people, partly explain this shift? This misleading measure of inflation and policy approach has led to maintaining official rates lower than they might have been otherwise, which benefit finance, especially equity investments.

According to history, "Washington" is unlikely to change it frameworks (price and policy) unless another crisis occurs. The financial press could increase public awareness of this issue, but it has not done so yet. As long as the existing price and policy frameworks remain in place, finance benefits while "Joe Six Pack" loses ground to "actual" inflation.

The Fed Must Target "Actual" Inflation

Mickey D. Levy

The persistently stronger growth of the U.S. economy relative to most other advanced nations has been the driving factor that has resulted in a stronger stock market with higher valuations, higher interest rates and a strong US dollar.  A handful of charts highlight the sizable differences in economic and financial market performance across nations.  Nothing is permanent, and things—particularly shifts in economic policies--can initiate sizable changes in trends.  As we assess shifts in economic policies and central bank monetary policies, it’s important to keep in mind the economic fundamentals that drive financial markets.

**Real growth comparisons**.  Chart 1 shows the cumulative percent change in real GDP since 2000 in the U.S., UK, Europe and Japan.  In general, the faster growth in the U.S. reflects a combination of healthier gains in labor force and productivity.  Real GDP growth in the UK matched the U.S.’s pace from 2000-2008, while Europe nearly kept pace, benefiting from the boom in global trade fueled by the China super-cycle.  While the decade following the Great Financial Crisis was lackluster in the U.S., it was markedly slower elsewhere, particularly in Europe, which was hampered with ongoing financial crises during 2010-2014.

Chart 2 shows the same data but indexes real GDP to 2019Q4, which highlights the U.S.’s continued healthy growth following the pandemic-related contraction in the first half of 2020, while growth in Japan, the UK and Europe has been particularly weak.  The persistent outperformance of the U.S. economy is sizable.

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The GDP comparison between the U.S. and Canada tells a different story, as shown in Chart 3.  Unlike other advanced nations, Canada’s economy kept pace with the U.S. in the early 2000s, benefiting from its strong growth in its labor force fueled by immigration and the high demand for its exports of natural resources.  Following the GFC, growth in Canada outpaced the U.S’s soft recovery.  Canada’s growth slowed beginning in 2015 with the decline in oil prices and its shift in economic policies that focused on redistribution and social issues and deterred business expansion and economic growth. Canada’s economy has stumbled markedly in the 2020s. To highlight Canada’s weakness and lack of confidence, its business investment as a percent of GDP drifted down prior to the pandemic, plummeted in 2020, and has failed to recover, as shown in Chart 4.

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Calculations of productivity vary for different nations and are not directly comparable. However, the U.S.’s pace of technological innovation and the implementation of new innovations into commerce and society seems significantly more pronounced than in other advanced nations.  These growth and wealth-enhancing characteristics in the U.S. are facilitated and fueled by the structure of its capital markets, along with its higher degree of risk-taking and entrepreneurial spirit. These characteristics in the U.S. attract global innovators and risk-takers. Various nations are encouraging and rewarding innovation and facilitating advances in capital markets, a distinct positive for global grow.  However, at this point, a comparison of pro-growth characteristics in the U.S. and Europe, and Europe’s diminished potential growth, is striking. Note that amid the political turmoil in Europe, its leaders are discussing just about everything except policies that would promote sustainable economic growth.

Labor and employment data are similarly difficult to compare across nations.  The U.S.’s labor force has continued to grow and is very flexible, with significantly higher mobility than in other nations. The U.S.’s policies that influence the supply and demand for labor leave much room for improvement, but in general facilitate labor mobility much more than other nations.  This enhances the efficiency of business production.  The U.S. has also benefited from immigration, and except for Canada, is seemingly more adept than other nations at assimilating immigrants into the workforce and society.  Of note, while Japan now welcomes a large and growing number of foreigners into its workforce that offset the impact of its declining population, many nations in Europe, particularly Germany, have policies that constrain the mobility of labor and reduce economic efficiencies.

**Stock market comparisons**. Charts 5 and 6 show comparisons of the cumulative appreciation of stock markets.  Of note, Chart 5 measures the cumulative percent changes in the stock market indexes since 2000 in local currencies, while Chart 6 measures the percent changes in total stock market returns including dividends, in US$ terms.  Thus, the recent strength in the US dollar compounds the comparative U.S. advantage.

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The outperformance of the U.S. stock market reflects a combination of healthy economic growth, strong profits, growth leaders and high valuations based on favorable expectations.  The higher returns on the U.S. stock market generate expectations that the relative advantage will continue.  In the last decade, the U.S. has benefited significantly from new growth leaders that garner high multiples.  Those stock market leaders have also been the critical drivers of U.S. business investment and growth of the economy.  Certainly, there are periods when other nations’ stock markets outperform, but history shows that those periods are temporary.  Valuations and P/E multiples are higher in U.S. stock markets that in other markets, reflecting favorable expectations of future economic and profit growth.

**Interest rate comparisons.** The U.S.’s economic growth and productivity gains raise expected rates of return on capital, which lifts real interest rates.  Following the sustained period of low real rates that accompanied the GFC and subsequent decade of weak growth, real rates have normalized.  They are now similar to (but still below) the high real interest rates that accompanied the strong productivity-driven growth of the second half of the 1990s.  Except for Japan, inflation in all advanced nations has receded, and central banks have raised their policy interest rates above inflation.  The Bank of Japan is now normalizing interest rates as it strives to lift inflationary expectations to 2%. Bond yields have risen in all advanced nations and except in Japan, exceed inflationary expectations. Charts 7 and 8 show an international comparison of central bank policy rates and bond yields.

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**Exchange rates.** In an international context, capital tends to flow to the highest risk-adjusted expected rate of return.  Accordingly, the higher expected rates of return on US dollar-denominated assets are associated with a stronger US dollar.  Charts 9 and 10 show the trade-weighted dollar for advanced foreign economies and the dollar versus the yen and the Euro. The trade-weighted dollar is at high levels similar to levels of the late 1990s and early 2000s before it depreciated significantly and near all-time highs versus the yen.

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It is always important to assess how economic policies in the U.S. and globally influence economic and financial market performance.  Currently, the potential for shifts in policies is high.

Advantage U.S.:  Its Economy, Stock Market, Interest Rates and the Dollar

Has the traditional business cycle become obsolete? Not entirely, but major substantial changes in monetary policies and in the methods for calculating price measurement statistics, have altered the manner in which business cycles end. Business cycles consist of two components: an economic cycle and a financial cycle. Changes in policy and price measurement have shifted the pressures and excesses of the business cycle from the economy to the financial sector. In other words, high P/E ratios have taken the place of high CPI figures.

What Causes the Ups and Downs of a Business Cycles?

Some analysts and academics argue that the traditional business cycle characterized by increasing inflation and interest rates that eventually leads to an end of the cycle no longer exists. This perspective is somewhat supported when comparing business cycles before 1990 with those after.

For instance, since 1990, every business cycle has concluded with relatively low headline and core inflation. In contrast, from 1960 to 1990, business cycles ended with inflation rates of at least 5%, sometimes reaching double digits, with official rates significantly exceeding reported inflation.

However, to assess whether the traditional business cycle is now obsolete, it is crucial to first ascertain if the expansion and recession phases are influenced by government fiscal and monetary policies, developments in financial markets, or an exogenous shock. (Note: The business cycle that ended in 2020 was initiated by an unforeseen event, the pandemic, unlike the recessions of 2000 and 2007. However, in all three instances, both headline and core inflation were relatively low).

Essentially, significant technological advancements and globalization from the mid-1990s and beyond have decreased business cycle volatility, limiting or postponing price pressures that previously would have arisen during a typical business cycle. However, there are other factors at work as well.

During the mid-1990s, the approach to conducting monetary policy shifted from focusing on money and credit growth to targeting real interest rates. Most financial market analysts, myself included, did not initially see this shift in monetary policy as a major transformation. However, it turned into one when the BLS altered its method of measuring consumer prices in 1998.

In the late 1990s, the BLS stopped surveying the owner-occupied housing market to estimate owners' equivalent rent and began using data from the primary rental market, despite the fact that these two housing markets are influenced by different factors and frequently exhibit significantly different supply and demand patterns. At the same time, non-housing financing costs were removed from the CPI, continuing the previous exclusion of housing financing costs in the 1980s.

At that time, participants in the financial market did not consider these changes in price measurement to be significant. However, they were extremely important. During the housing bubble of the early 2000s, while housing prices experienced double-digit increases, the CPI indicated housing cost increases of only 2% to 4%. If the BLS had not implemented the measurement changes in the late 1990s, reported inflation would have been easily double what was reported.

(Note: The BLS excluded housing prices from the CPI in 1983, but continued to survey owner-occupied housing to estimate the implied rent for homeowners, maintaining a direct connection between housing inflation and increases in owners' rent. This connection was severed with the measurement changes in 1998).

The removal of non-mortgage interest costs also had a big impact on reported inflation. A joint research project by economists from Harvard and MIT found that the CPI from 2021 to 2023 would have been twice as high if consumer financing costs for were still included in price measurement.

Still, altering the methods for measuring prices had notable economic and financial impacts. Indeed, the revised CPI measure exhibits significantly less cyclicality, leading the Fed to aim for lower nominal and real interest rates than it would have if the BLS had not made these adjustments. This has led to considerably higher P/E ratios since 2000.

Economic downturns can stem from asset markets, as shown by the stock market crashes in 2000 and 2007, followed by recessions. The S&P 500 is trading at 22 times the projected earnings for 2025, and even higher compared to free cash flow projections. Other market indicators, such as the price-to-sales ratio, are also exceptionally high.

Therefore, the equity market is susceptible, particularly to an additional increase in market interest rates. Historically, the risk of recession increases when the yield on the 10-year Treasury surpasses the growth in Nominal GDP. According to current figures, there is merely a positive spread of 20 basis points with GDP outpacing the yield on the 10-year Treasury. However, current yields might still be too high given the lofty levels of the equity market.

However, the primary threat to the equity market and the economy lies in the fiscal strategies of the new administration. With the existing budget approaching $2 trillion, it is not financially viable to make the 2017 tax cuts permanent, as they are estimated to cost $4 trillion over the next decade, along with introducing further federal tax cuts. Even if the new Administration succeeds in reducing federal spending, it will not be significant enough to offset both past and new tax cuts, resulting in a budget deficit as large or larger than the current one.

More than three decades ago, President Bill Clinton shifted from his new economic agenda, which featured a middle-class tax cut, to a deficit-reduction strategy in response to the threat of increasing interest rates. At that time, the US was dealing with projected budget deficits ranging from $300 to $400 billion, compared to today's deficits exceeding $2 trillion.

Should the Trump economic team ignore the lessons from 2000, 2007, or even 1993, there is a genuine risk of a significant increase in interest rates. Market interest rates have previously impacted the fiscal strategies of a new president, and they have the potential to do so again, if not, the risk of financial chaos will increase.

Viewpoints: September 2019

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"Solving" The Profits Puzzle

State Coincident Indexes

The Profits Puzzle

State Labor Markets in August

US Purchasing Managers "Recession" Warning---- Few Firms Report Gains in Orders and Production