Ed Dolan's Econ Blog

Latest Data Show U.S. Corporate Profits Falling Due to Global Woes While GDP Growth Remains Sluggish

The final estimate from the Bureau of Economic Analysis shows U.S. real GDP growing at a sluggish 1.9 percent annual rate in Q1 2012, the same as in the second estimate released at the end of May. Nominal GDP grew at a 3.9 percent annual rate. That is slightly faster than previously estimated but still well below the rate that NGDP targeters consider necessary to close a persistent output gap and return the economy to full employment.

The BEA also released revised data showing that corporate profits in Q1 were weaker than previously thought. The broadest measure, corporate profits before tax with capital consumption allowance and inventory adjustment, decreased by 0.3 percent compared with Q4 2011. As the chart shows, that was the first decrease since profits hit their cyclical low in mid-2008. After tax profits with adjustments decreased much more sharply, by 5.9 percent. The difference reflected a whopping 20 percent increase in corporate profits taxes for Q1 2012 compared with Q4 2011.

The drop in corporate profits was largely due to weakness in the global economy. Domestic profits of U.S. corporations rose by a healthy 2.6 percent in Q1 2012 compared with Q4 2011 (5.7 percent for the financial sector and 1.4 percent for the nonfinancial sector). However, foreign profits fell by 12 percent, more than wiping out the increase in domestic profits, as receipts from the rest of the world fell and payments rose.

The effects of a weak global economy are also evident when we look at the sector-by-sector contributions to GDP change in the final estimate for Q1. The second estimate had shown U.S. exports (GDP basis) contributing .98 percentage points to the reported 1.9 percent growth of GDP. The final estimate released on Thursday cut that contribution sharply, to just .58 percentage points. The foreign sector as a whole contributed .1 percentage points to growth, slightly more than the .01 reported last month, but only because imports weakened even more than exports.

The contribution of other sectors to real GDP growth changed little from the second to the final estimate. Gross private domestic investment was slightly stronger than reported earlier and consumption slightly weaker. The shrinkage of the government sector was fractionally more rapid than in the second estimate. Government consumption expenditures and gross investment subtracted 0.8 percentage points from GDP growth in Q1. Lower federal defense expenditures accounted for .46 percentage points of that, but federal nondefense expenditures also decreased, along with state and local expenditures. The resulting fiscal drag is a second factor behind weak performance of the U.S. economy, together with the slowdown in Europe and many emerging markets.

It should be kept in mind that changes from the second to the final GDP estimates do not, technically speaking, imply actual changes in the economy. Instead, they should be interpreted as improved estimates of what happened in the quarter from January through March. However, the final estimate does contain more accurate data for the latter part of the quarter, compared with earlier releases, which relied more on data from early in the quarter and extrapolations based on historical trends. Looking at the GDP revisions for Q1 in that light, it would perhaps be wise to brace ourselves for the possibility of more bad news when the Q2 preliminary estimates are released at the end of July.


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