BP BP Plc

By Ben Leubsdorf 

U.S. corporate profits extended their rebound in late 2016 as the broader economy remained on a trajectory of steady, modest growth.

A measure of after-tax corporate profits jumped 22.3% in the fourth quarter compared with a year earlier, the Commerce Department reported Thursday. The measure's strongest year-over-year gain in nearly five years partly reflected a low base in the final months of 2015, when earnings 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.

As a share of the total economy, profits were 9.2% of gross domestic product in the fourth quarter, below record levels seen earlier in the expansion but up from 7.8% a year earlier.

It is "a good recovery from the bottom, but we are not back to where we were," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Earnings deteriorated in 2015 as exporters, energy companies and other firms were pressured by forces including a strong dollar, falling commodity prices and weak global growth. But oil prices stabilized last year and the global outlook has brightened, helping bolster U.S. businesses.

For all of 2016, profits rose 4.3% after falling 8.5% in 2015. In the fourth quarter, profits climbed 3.7% from the prior three months -- the fourth consecutive quarter of growth.

Looking forward, corporate profits are expected to continue firming. Mr. Silverblatt said companies in the S&P 500 are estimated to post year-over-year earnings growth of 21.7% in the first quarter, with more moderate gains going forward.

The stock market's rally since November "definitely had some merit to it, because earnings were already getting better," he said, though he said it is also owed much to expectations about tax cuts and other policy changes under the new Trump administration.

Overall U.S. economic growth in the fourth quarter was revised up from earlier estimates. GDP, 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. The government had earlier estimated growth at a 1.9% pace.

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."

U.S. economic activity has appeared to decelerate 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. Forecasting firm Macroeconomic Advisers on Thursday projected a first-quarter growth rate of 1.1%.

U.S. growth has averaged 2.1% 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 and sustained boost for growth.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

March 30, 2017 11:58 ET (15:58 GMT)

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