The Horizon
Two versions of one account statement, both dated March 2046. Same man, same forty years of contributions, same discipline.
In the first, the capital sat in instruments that promised a fixed number. In the second, it sat in claims on corporate earnings that repriced every quarter alongside the price level.
Both statements are livable. The mechanism that separates them appeared in a government release on Wednesday, when corporate profits rose $400.9 billion in a quarter the economy grew 1.5%.
The Event
The Bureau of Economic Analysis published the second estimate of second-quarter GDP on August 26, release BEA 26-38. Real GDP grew at a 1.5% annual rate, unrevised from the advance estimate.
That is a deceleration from 2.1% in the first quarter. Real gross domestic income, the income-side measure of the same economy, grew 2.2%.
Prices inside the release ran far hotter than the growth figure. The PCE price index rose at a 5.3% annual rate for the quarter, core PCE at 3.6%, and the gross domestic purchases price index at 5.8%.
Profits from current production rose $400.9 billion in the second quarter. The comparable first-quarter figure was an increase of $74.4 billion.
Real final sales to private domestic purchasers, which strips out inventories and trade, grew 4.2%. The distance between that and the 1.5% headline is where inventories and net exports sit.
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The Path
Add 1.5% real growth to a 5.3% price index and the economy produced roughly seven percent more nominal output. Equity is a claim on nominal cash flows, not real ones.
That is how profits rose $400.9 billion in a quarter the coverage called slow. Companies repriced faster than they grew volume.
Corporate profits are the numerator of long-run equity returns. Across a twenty-year holding period an index position tracks the earnings behind it far more closely than it tracks any single quarter of price action.
One print is not a regime and this quarter establishes no trend. What it does establish is which side of the balance sheet nominal growth accrued to.
The same 5.3% deflator that lifted those profits is the thing a fixed coupon cannot escape. A ten-year Treasury yielding 4.69% on August 20 was earning negative real carry against the quarter's price index.
Holding both equities and nominal bonds is therefore not a contradiction. It is two sides of one inflation trade, and this release named the side that got paid in the second quarter.
The reach extends into business capital. For anyone who owns an operating company, the national accounts just described his own income statement, because profits rose on prices rather than on units.
Pricing power measured at country scale is a line a builder can audit directly in his own books. That audit needs last quarter's invoices, not a forecast.
Core PCE running at a 3.6% annual rate for the quarter sits well above the 2.5% twelve-month core CPI reading and further above the Federal Reserve's 2% objective. The quarterly run rate is what makes the July dissent legible.
Three dissenting votes at the July meeting favored tightening. This release is the arithmetic sitting underneath them.
The 4.2% growth in real final sales to private domestic purchasers is the cleaner read on domestic demand. Underlying demand ran nearly three times the headline rate.
Reading only the 1.5% figure would produce the opposite conclusion about the economy a portfolio operates inside. The income side growing 2.2% against output at 1.5% points the same direction.
Nominal output growth near seven percent is the figure worth carrying forward. It is the pool that wages, profits, rents and tax receipts are all drawn from.
The Watch
Kevin Warsh steps to the Jackson Hole podium at 10:00 Eastern this morning, his first turn there in the chair. Wednesday's release sharpened the question waiting for him: whether a 3.6% core quarterly run rate qualifies as temporary.
Two dates follow. Policy comes under review on September 15 and 16, currently from a 3.50% to 3.75% band, and the August inflation report lands on September 11.
The BEA issues its third estimate of the quarter near the end of September, with profits revised alongside it. That revision is the one to read, because the $400.9 billion figure is the claim being tested.
A single quarter settles nothing about the next twenty years. It did put a number on where nominal growth landed, and the profits line is the one worth following from here.