{"text":[[{"start":5.55,"text":"The writer is a financial journalist and author of ‘The Economic Consequences of Mr Trump’"}],[{"start":11,"text":"Investment analysts are as heady as a schoolboy who has just experienced his first kiss. They are so optimistic that they are upgrading their profit forecasts by record amounts. According to Andrew Lapthorne at Société Générale, the 12-month forward earnings forecast for companies in the MSCI AC World index has been upgraded by $1.2tn in the past year, or 30 per cent. It is not just about technology companies; the high oil price means the energy sector has also seen big upgrades."}],[{"start":42.55,"text":"This optimism is part of a longer-term trend. Figures from the Federal Reserve Bank of St Louis show that US corporate profits are close to a record high as a percentage of GDP. Analysis by the St Louis Fed shows that this surge began around the start of the pandemic and was driven in part by a decline in net borrowing costs as interest rates declined. There was a stark divide at the sectoral level. The profit share of GDP of the finance sector was stable but the profit share of domestic non-financial industries surged from 8.1 per cent of national income over the 2010-19 period to 11.2 per cent in the last quarter of 2024."}],[{"start":84.94999999999999,"text":"All this helps to explain why the stock market has been so resilient in the face of conflict in the Middle East, the surge in oil prices and the US administration’s erratic policy agenda on trade. But the profits surge also points to other economic developments that may not be so welcome in the long term, either for the current US government or for investors."}],[{"start":105.85,"text":"An alternative explanation for the surge in corporate profits is derived from the so-called Kalecki-Levy profits equation, a synthesis of the ideas of two economists Jerome Levy and Michal Kalecki. This suggests that the surplus of the corporate sector is driven by changes in other parts of the economy, notably the budget deficit of the government and the savings rate of the personal sector."}],[{"start":130.4,"text":"Why is this true? If the government cuts taxes for the corporate sector, and does not offset this with tax increases elsewhere, then money will flow into corporate coffers. Meanwhile, if the private sector increases its savings rate, then consumers will have less money to spend on the goods and services produced by companies. But if individuals save less, they will have more to spend."}],[{"start":155.5,"text":"Both factors have clearly been at work since the pandemic. The US budget deficit shot up in 2020, as the government tried to cushion the economic impact of the pandemic, and has stayed high since. (A similar pattern was seen in other democracies.) This year, the Congressional Budget Office estimates that it will be 5.8 per cent of GDP."}],[{"start":175.9,"text":"Meanwhile, the US personal sector’s savings rate has fallen sharply since the start of 2024, and is now back to levels not seen since the financial crisis of 2007-09. The evidence suggests that US consumers are struggling to make ends meet in the face of rising prices, particularly for fuel. The University of Michigan survey shows that consumer confidence is at a record low. This shouldn’t be too surprising as Fed analysis shows that workers’ wages as a proportion of GDP were slightly lower at the end of 2024 than in the 2010-19 period. As companies have gained, workers have lost ground."}],[{"start":217.05,"text":"The Kalecki-Levy equation suggests some awkward trade-offs for the US government and markets. Economists are fond of discovering trilemmas; three policy goals that cannot be achieved simultaneously. In foreign exchange, for example, countries cannot have a fixed exchange rate, independent monetary policy and free capital movements; they must sacrifice one of the three. "}],[{"start":239.10000000000002,"text":"There may be a similar trilemma currently at work. Countries can have booming corporate profits, a shrinking budget deficit and happy consumers, but they cannot have all three at once. President Donald Trump is very keen on trumpeting the strength of the US stock market, as demonstrated by repeated record highs, but those booming share prices may be linked to the unhappiness of consumers. Trump’s approval rating for his handling of both inflation and the broader economy has plunged."}],[{"start":269,"text":"Similarly, if a big budget deficit is a driving force behind the surge in profits, then eventually the bond market may react. Bond yields play a key part in stock market valuation, since they are used to help discount future profits growth. If yields shoot up, then those profits will be worth less in today’s money. While bond yields have edged up a bit this year, profit forecasts have easily outpaced this rise in the discount rate. But eventually, higher bond yields may impose their toll. Schoolboy crushes often end in disappointment."}],[{"start":307.35,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1782383416_2208.mp3"}