U.S. Corporate Profits Gathered Steam in 4th Quarter--Update
March 30 2017 - 10:53AM
Dow Jones News
By Ben Leubsdorf
A key measure of profits at U.S. companies continued to gain
traction in the final months of 2016 as broader economic growth
remained steady and modest.
Corporate profits after tax, without inventory valuation and
capital consumption adjustments, rose 3.7% from the prior quarter
to a seasonally adjusted annual rate of $1.741 trillion in the
fourth quarter, the Commerce Department said Thursday. It was the
fourth consecutive quarter of profits growth.
Profits jumped 22.3% in the fourth quarter compared with the
same period in 2015, when earnings had plunged amid a slump in
energy prices, weakness in the manufacturing sector and BP PLC's
massive settlement with the U.S. government over the 2010 Deepwater
Horizon oil spill in the Gulf of Mexico. It was the largest
year-over-year gain for the measure in nearly five years, since the
first quarter of 2012.
For all of 2016, profits rose 4.3% from the prior year after
falling 8.5% in 2015 -- the strongest calendar-year profits growth
since 2012.
Overall U.S. economic growth in the fourth quarter was revised
up from earlier estimates. Gross domestic product, a broad measure
of the goods and services produced across the economy, expanded at
an inflation- and seasonally adjusted annual rate of 2.1% in the
final three months of 2016, according to Thursday's report.
"Through the volatility, the trend in growth has remained close
to 2%, which is weak by past standards, but strong enough in the
current cycle to bring down the unemployment rate," said Jim
O'Sullivan, chief U.S. economist at High Frequency Economics, in a
note to clients. The Commerce Department had earlier pegged
fourth-quarter GDP growth at a 1.9% rate. Economists surveyed by
The Wall Street Journal had expected a smaller upward revision to
2.0%.
Consumer spending in the fourth quarter was stronger than
previously thought, offset in part by downward revisions for
business investment, net exports and spending by state and local
governments.
Thursday's report "paints a picture of a healthy consumer,
likely fueled by ongoing gains in employment, modest increases in
wages, and solid balance sheets," Barclays economist Blerina Uruci
said in a note to clients. "However, fixed investment remains
soft."
Household outlays drove overall GDP growth in late 2016,
contributing 2.4 percentage points to the quarter's 2.1% growth
rate. A wider foreign-trade deficit subtracted 1.82 percentage
points but another volatile category, private inventories, boosted
growth by 1.01 percentage points. Business investment, government
spending and the housing sector made smaller contributions to
fourth-quarter growth.
U.S. growth appeared to slow in the current quarter, depressed
by a widening trade gap and soft consumer spending. Some economists
also think seasonal-adjustment problems have caused first-quarter
growth to look weaker than the true trend in recent years.
The first quarter ends Friday, and the U.S. government will
release its initial estimate for first-quarter GDP on April 28.
U.S. growth has been stuck near 2% since the recession ended in
mid-2009. Many economists believe underlying forces, including
sluggish productivity gains and the aging of the U.S. workforce,
will continue to constrain growth in the coming years. The median
projection by Federal Reserve policy makers in mid-March saw the
economy's long-run growth rate at 1.8% a year.
President Donald Trump, who took office in January, has said he
wants to boost annual economic growth to 4% through a combination
of tax cuts, regulatory rollbacks and other policy changes. Gauges
of U.S. consumer and business sentiment have surged since the
November election. But there has been little sign of acceleration
in hard data on economic activity and some economists are skeptical
about the prospect of a significant, sustained boost for
growth.
For U.S. corporations, profits as a share of total economic
output have moved down from record highs seen earlier in the
expansion, though they remain well above their long-term average
level. In the fourth quarter, after-tax unadjusted profits totaled
9.2% of GDP, not adjusted for inflation.
Earnings deteriorated in 2015 as exporters, energy companies and
other firms were pressured by forces including the strong dollar,
falling commodity prices and weak global growth. But oil prices
stabilized last year and the global outlook has brightened, helping
bolster profits in the U.S.
"In recent quarters, the environment has become more favorable,"
Fed governor Lael Brainard said in a March 1 speech, citing an
upturn in profits among other evidence of renewed health in the
business sector.
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
(END) Dow Jones Newswires
March 30, 2017 10:38 ET (14:38 GMT)
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