Pretax earnings increase 7.7%

Firms flush with cash are boosting spending and stock buybacks. But will it continue?

Bullish, for now. That’s the takeaway from corporate America’s second-quarter earnings.

Pretax profits at U.S. companies climbed 7.7% from a year earlier, the most since 2014 and the seventh consecutive gain, according to Commerce Department data released Wednesday. Throw in the boost from lower taxes that went into effect this year under the Trump administration, and firms have plenty of wherewithal for more investment and hiring.

The expanding coffers are reflected in a stock market hitting record highs. Businesses are also putting the cash to use: Nonresidential fixed investment, which includes spending on equipment, structures and intellectual property, increased last quarter by 8.5%, revised up from a previously estimated 7.3%, the data showed. Spending on business equipment rose an upwardly revised 4.4%.

Firms are also on a stockbuyback spree after the tax windfall, with Goldman Sachs Group Inc. estimat-

ing that companies in the Standard & Poor’s 500 index will authorize $1 trillion in stock buybacks in 2018, a record and a 46% jump from last year.

The big question is whether companies will continue to be as enthusiastic about investing and employment, given the head winds from a trade war and a fading benefit from President Trump’s tax cuts. The latest figures indicate that the boost from tax cuts “has already hit the corporate bottom line,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

After-tax corporate profits grew 2.4% last quarter from the prior period, down from an 8.2% jump at the start of 2018, according to the Commerce Department’s first estimate of secondquarter profits.

“We just had one of the biggest giveaways in corporate and individual tax cuts in modern economic history, and it would be foolish to ignore these as the primary driver of economic growth this year,” Rupkey wrote in a note. “2019 is a different story.”

It also remains to be seen whether employers’ fatter bottom lines will finally translate into more generous hikes in workers’ paychecks, which have been disappointing throughout this expansion even as the labor market has tightened.

Wages and salaries grew 4.4% last quarter, following a 5.8% gain in the Januarythrough-March quarter.

Also on Wednesday, the Commerce Department revised up its estimate for the nation’s economic growth. It said the U.S. economy grew at a strong 4.2% annual rate last quarter — up from an initial estimate of 4.1% — as growth stayed on track to produce its strongest fullyear gain in more than a decade. Strength in business investment offset slightly slower consumer spending.

The second quarter’s economic growth marked a sharp improvement from a 2.2% growth rate in the January-through-March period, though some of the strength last quarter came from temporary factors, including a surge in U.S exports before tariffs were to take effect.

Economists expect growth to slow to a still-solid 3% annual rate the rest of the year, resulting in fullyear growth of 3% for 2018. It would be the best performance since 2005, two years before the Great Recession began.

The 4.2% annual growth that the government estimated for last quarter is the strongest such figure since a 4.3% annual gain in the third quarter of 2014. The expectation of 3% growth for 2018 as a whole would be up from gains of 1.6% in 2016 and 2.2% last year.

Since the recovery began in mid-2009, growth has been subpar, with annual gains averaging just 2.2%, making it the weakest recovery in the postwar period.

Trump often pointed to that fact during the 2016 presidential campaign to attack the economic record of the Obama administration. He has touted the pickup in growth, as measured by the gross domestic product, as evidence that his economic program of tax cuts, deregulation and tougher enforcement of trade agreements is working. Last month, Trump proclaimed that the GDP figure showed that the United States was now the “economy envy of the world.”

While forecasting solid growth of around 3% this year, economists contend that this performance is being pumped up for now by the $1.5-trillion tax cut Trump pushed through Congress last year, along with increased government spending. Many analysts say they think that those factors will begin to fade starting next year and that by 2020, growth may even slow enough to edge the economy close to a possible recession.

Gus Faucher, chief economist at PNC, said he foresees GDP growth this year of 3.4%, which he thinks will slow to 2.4% in 2019 and 1.6% in 2020 “as the fiscal stimulus from tax cuts and spending fades.”

Faucher said he thinks that continued interest rate hikes by the Federal Reserve will also act to slow growth.

Trump has recently criticized the Fed, arguing that the rate hikes pose a threat to the faster growth he is trying to fuel with his economic policies.

Some economists said Wednesday’s upward revision of GDP growth would give the Fed leeway to raise rates twice more by year’s end, as it has signaled it expects to do.

“The economy’s good fortune is giving Fed officials the green light to take away the emergency stimulus left over from the recession and financial crisis a decade ago,” Rupkey said.

Trump administration officials reject outside forecasts that growth will inevitably slow after this year. They suggest the Trump policies will unleash an economic boom that will deliver annual growth rates of 3% or better over the next decade.

Treasury Secretary Steven T. Mnuchin, in a CNBC interview Tuesday, pointed to the solid GDP performance in the spring as evidence that the administration is fulfilling Trump’s campaign promises regarding the economy.

“We are delivering on what was the president’s economic agenda about creating growth,” he said.

Wednesday’s GDP report showed that consumer spending, which accounts for about 70% of economic activity, expanded at a strong annual rate of 3.8% in the second quarter, down slightly from an initial estimate of 4% growth. But that downward revision was outweighed by other factors including stronger business investment, which grew at a 6.2% rate, driven by spending on such items as computer software.

Other sources of strength were less growth in imports, which subtract from GDP, and faster growth in government spending at the federal, state and local levels.