Obama’s Budget Has Bad News for Shareholders

(Originally published here.)

President Barack Obama’s latest budget contains some intriguing economic forecasts. Stock market bulls better hope those forecasts are wrong.

According to the boffins in the Office of Management and Budget, corporate income in 2023 will be more than 13 percent lower than it is today — and that’s before accounting for inflation and taxes. This decline is not predicted to be smooth. Instead, the forecasters predict steady earnings growth until the beginning of 2018. Profits are then projected to fall by nearly a third over the following six years. That’s a surprisingly steep decline.

The projections say the share of national income earned by U.S. corporations as profits before taxes will decline from today’s high of 12.4 percent. (This figure includes the standard inventory valuation and capital consumption adjustments.) That makes sense. In theory, declining joblessness should give workers greater leverage over firms. The share of national income going to salaries and wages should rise, and the share going to profits should fall. But the projected fall in the absolute level of profits (not just the profit share) is bigger than you’d expect in a steadily growing economy.

I combined the OMB’s corporate profits forecast with its forecast for nominal gross domestic product to create an implied projection for the corporate profit share. By the end of 2023, the decline in the profit share will be bigger than anything observed since at least the early 1950s. It’s not clear why firms would want to invest or hire workers if they believed these profit projections.

Sources: Bureau of Economic Analysis, Office of Management and Budget, Bloomberg

Sources: Bureau of Economic Analysis, Office of Management and Budget, Bloomberg

Despite falling profits, the OMB’s forecasters project higher receipts from corporate taxes — implying, on the face of it, a big increase in the effective corporate tax rate. The closing of loopholes and new treatment of foreign earnings may have a bigger effect on earnings than investors are expecting.

The Obama budget has one simple message: Shareholders, be warned.

(Matthew C. Klein is a contributor to the Ticker. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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