By Ben Leubsdorf
U.S. corporate profits, hit hard last year by the energy
downturn and strong dollar, show signs of stabilizing as oil prices
dance around $50 a barrel and economic growth appears to be picking
up. But American companies still face earnings pressure due to
rising wage growth and a still-weak global economic expansion.
A key measure of corporate profits -- after taxes, without
inventory valuation and capital consumption adjustments -- rose at
a 1.9% pace in the first three months of 2016, the Commerce
Department said Friday. That was after dropping at an 8.1% pace in
the fourth quarter and a 3.3% decline in the third quarter.
"At least it's not negative," said Christine Short, senior vice
president at analytics firm Estimize, though she added that the
profit rebound is "still nothing to write home about."
The broader economy seems on track to rebound after a weak
performance over the past few quarters. Gross domestic product, a
broad measure of goods and services produced across the U.S.
economy, expanded at a 0.8% seasonally adjusted annual rate in the
first three months of 2016, the Commerce Department said in updated
figures out Friday. That was up from an initial estimate of 0.5%
growth but still represented a deceleration from the fourth
quarter's 1.4% growth rate.
The resilience of corporate profits in the months ahead will be
key to supporting the stock market, which has returned near the
all-time highs reached last spring. It's also critical to firms'
ability to hire workers and invest in new equipment and
facilities.
Some analysts cautioned that the fourth-quarter decline in
corporate profits and first-quarter rebound were likely driven in
part by BP PLC's record settlement with the U.S. government over
the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, which
was finalized late last year. On a year-over-year basis, profits in
the first quarter were down 3.6% for the second straight quarter,
and profits as a share of the overall economy remain depressed from
the record levels reached earlier in the expansion.
Company earnings should be falling or flat on an annual basis
over the next two quarters, but are expected to turn positive late
this year, said Ms. Short. Rising oil prices and a stable dollar,
she said, are set to be "a tremendous help."
Crude prices touched $50 a barrel this past week for the first
time since last year, propelled by the most powerful rally in seven
years. Higher prices are set to ease pressure on energy firms that
have shed workers and pulled back on drilling across the oil patch
over the past two years.
The dollar, meanwhile, has been more or less stable over the
past year after rising sharply against other major currencies in
late 2014 and early 2015 as the Federal Reserve prepared to begin
raising short-term interest rates. A stronger dollar has made
U.S.-made products more expensive for foreign customers, reducing
demand for exports and squeezing the domestic manufacturing
sector.
Beyond the corporate sector, consumer spending and a healthier
housing market are supporting continued economic growth. But
overall activity remains sluggish. J.P. Morgan Chase economists on
Friday warned that economic indicators signal a 34% chance of a
recession within 12 months, the highest level since it began
tracking the risk last year.
The worst may be over from the oil downturn and effects of a
strong dollar. But a tightening labor market is pushing up wages
"and that probably is cutting into margins" more broadly, said
Jesse Edgerton, a J.P. Morgan Chase economist.
Meanwhile, metrics of consumer confidence and spending,
housing-market activity and foreign trade are all pointing to a
pickup in GDP growth in the current quarter. Forecasting firm
Macroeconomic Advisers on Friday projected growth would accelerate
to a 2.5% pace in the second quarter.
That could prompt Fed officials to support a second increase in
short-term interest rates. The U.S. central bank in December raised
its benchmark federal-funds rate, which had been pinned near zero
for seven years, to a range of 0.25% to 0.5%. Since then, policy
makers have exercised caution in the face of worries about global
growth and volatile financial markets.
The Fed has recently signaled that a move may come at its
upcoming meetings on June 14-15 or July 26-27. Investors on Friday
pegged the odds of a rate increase in June or July at 56%,
according to fed-fund futures tracked by CME Group.
Fed Chairwoman Janet Yellen said Friday that "probably in the
coming months such a move would be appropriate" if certain
conditions are met, including an improvement in economic
growth.
"We saw weak growth in the first quarter of the year and
relatively weak growth at the end of last year," she said during an
event at Harvard University. "Growth looks to be picking up, from
the various data that we monitor."
Household outlays, the housing sector and spending by state and
local governments all provided positive contributions to output
growth in the first quarter. Business investment, inventories and
foreign trade were all drags on growth.
Business spending remains a sore spot. The Commerce Department
this week reported that April saw a decline in a key proxy for
capital spending, orders for long-lasting civilian capital goods
excluding aircraft. That came after the first quarter saw the
steepest decline in fixed nonresidential investment -- a metric of
U.S. business spending -- since the tail end of the 2007-2009
recession, including sharply lower spending on structures and
equipment.
Chico's FAS Inc. said this past week that same-store sales fell
4.2% from a year earlier in the three months ended April 30. The
Fort Myers, Fla.-based women's apparel retailer said it plans to
scale back capital expenditures for this year and close dozens of
stores. "In this challenging environment, we are allocating our
resources prudently," Chief Financial Officer Todd Vogensen told
analysts Thursday.
Consumers seem to be in better shape. The unemployment rate in
April was 5%, half the level seen in the recession's immediate
aftermath, and long-sluggish wage growth has firmed by some
measures. Consumer spending expanded at a 1.9% rate in the first
quarter, and retail sales jumped in April at the fastest pace in a
year. The University of Michigan on Friday reported its index of
consumer sentiment rose to 94.7 in May, the highest level in 11
months.
The pace of job gains, though, may be slowing. Nonfarm employers
added 160,000 jobs in April, a deceleration from the first
quarter's monthly average of 203,000, according to Labor Department
data.
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
(END) Dow Jones Newswires
May 27, 2016 14:40 ET (18:40 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.