U.S. Corporate Profits Climbed as GDP Ticks Down to 1.1% -- Update
August 26 2016 - 6:24PM
Dow Jones News
By Ben Leubsdorf
A divide at the heart of the U.S. economy -- consumers ramping
up spending while businesses pulled back -- has left overall growth
stuck in the slow lane for now.
Household outlays surged this spring at their strongest pace in
a year and a half, but business investment declined for the third
straight quarter. The result was a modest 1.1% annualized economic
growth rate in the second quarter, according to revised Commerce
Department data released Friday.
Company earnings also remain under pressure, potentially
restraining investment in the coming months. A key measure of
corporate profits rose 4.9% in the second quarter, but gains this
year haven't been enough to offset a drop last year. Second-quarter
profits were down 2.2% compared with a year earlier.
Profit margins "are clearly past their cyclical peak" and "set
to compress further over coming quarters," Richard Moody, chief
economist at Regions Financial Corp., said in a note to clients. As
a result, "the risks to business investment remain tilted to the
downside."
Overall economic growth has been tepid since late last year,
with GDP advancing at a modest pace of 0.9% in the fourth quarter
of 2015 and 0.8% in the first quarter of 2016. But U.S. growth has
been poised to accelerate over the summer; forecasting firm
Macroeconomic Advisers on Friday predicted GDP would expand at a
3.2% rate in the third quarter, the best performance in two
years.
"Inventories were a major drag on growth in the second quarter,
but now that businesses have better aligned inventories with
demand, that should lift and inventories will add to growth in the
near term," PNC Financial Services Group chief economist Stuart
Hoffman said in a note to clients.
Friday's report showed slightly weaker second-quarter GDP growth
compared with the government's initial estimate last month of 1.2%.
Growth in consumer spending this spring was revised up, offset by
larger declines than had been previously estimated for residential
construction and government expenditures.
Consumer spending jumped at a 4.4% annual rate in the
April-to-June period, the strongest gain since the fourth quarter
of 2014. But fixed nonresidential investment, a measure of business
spending on equipment and other items, declined at a 0.9% pace
following larger drops in the prior two quarters. The slump partly
reflects weakness in the domestic energy industry because of low
prices for oil and other commodities.
Federal Reserve Chairwoman Janet Yellen took note of the divide
Friday in a speech at the central bank's annual retreat in Jackson
Hole, Wyo., contrasting "solid growth in household spending" with
"soft" business investment. Fed officials had flagged the same
divergence in their last two policy statements.
There are some tentative signs of stabilization for business
purchases of new equipment. New orders for nondefense capital goods
excluding aircraft have risen the past two months, according to the
Commerce Department.
But profits at U.S. corporations have been stressed in recent
years by weak foreign demand, a strong dollar -- making U.S. goods
more expensive for foreign customers -- and the energy sector's
woes. Margins could also be squeezed ahead by other factors
including rising labor costs and caution among some U.S.
consumers.
That in turn could restrain businesses' ability to buy new
equipment, facilities, software and other products.
"Although I expect business fixed investment to begin to grow
again in the second half, it will likely remain soft, as profits
have stagnated and election-year uncertainty could act as an
additional depressant," Federal Reserve Bank of New York President
William Dudley said last month.
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
(END) Dow Jones Newswires
August 26, 2016 18:09 ET (22:09 GMT)
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