Corporate profits

U.S. Q4 GDP revised up to 1.4%, but corporate profits fall

WASHINGTON—The slowdown in the fourth quarter was less pronounced than expected, but corporate profits have plummetedshowing that the economy entered 2016 on an uneven footing.

Gross domestic product, the broadest measure of goods and services produced in the entire economy, grew at a seasonally-adjusted annual rate of 1.4% in the fourth quarter, the Commerce Department said Friday. This is an upward revision from last month’s 1% growth estimate.

The output revision mainly reflects better consumer spending on services and confirms that the domestic economy is stable and growing. At the same time, falling profits and weak business investment show that overseas uncertainty has stung manufacturers, energy companies and financial markets.

“Consumer spending and housing are keeping the economy going, despite major drags in net exports, capital spending and the inventory cycle,” said IHS economist Nariman Behravesh.

US corporate balance sheets weakened during the quarter. After-tax corporate profits, without adjustments for inventory valuation and capital consumption, fell at an 8.1% pace in the last quarter from the third. This is the largest quarterly decline since the first quarter of 2011. Profits fell 3.3% in the third quarter compared to the second. Year over year, corporate profits fell 3.6% in the fourth quarter.

Yet for 2015 as a whole, profits were up 3.3% from 2014. The unadjusted measure of corporate profits best matches what companies report on their tax returns.

The reading of adjusted after-tax profit, which more closely reflects profits on production in the quarter, fell 15% in the fourth quarter from a year earlier. It was the biggest year-over-year decline in a quarter since 2008, when the United States was mired in a recession. The adjusted figures showed that the biggest drop in profits came in the manufacturing sector, particularly in the production of petroleum and coal products.

Earnings data is not adjusted for inflation.

“The strengthening dollar, sharp decline in energy costs and growing wage pressures have all played a role in lower profit margins and corporate revenues,” said Jim Baird, chief investment officer at Plante Moran Financial. Advisors. “In this context, it is not surprising that companies have reduced their capital expenditure.”

Friday’s report confirmed that business investment fell in the quarter. Non-residential fixed investment fell to a 2.1% pace, worse than the previous reading of 1.9%

Overall economic growth in the fourth quarter slowed from the 2% annualized advance in the third quarter. GDP grew 2.4% in 2015 from 2014, roughly matching gains since the economy emerged from recession in mid-2009.

Friday’s revisions showed consumer spending during the fourth quarter grew at a rate of 2.4%, up from the previous reading of 2%. The change accounted for 0.28 percentage point of the 0.4 point upward revision. The data reflects better spending on transportation, including airlines and auto repair, and recreation services, a category that includes spending at casinos, theaters and sports stadiums.

Strong consumer spending, which generates two-thirds of U.S. economic output, is essential for growth as an uneven global economy presents challenges for manufacturers and other businesses with foreign customers.

For the year as a whole, consumer spending rose 3.1%, the fastest pace since 2005.

Residential investment, another domestically-oriented category, grew at an upwardly revised 10.1%, the best gain in a year and a half.

Trade was less of a drag on production in the last quarter. The decline in exports, down 2%, was less severe than the previous estimate of a 2.7% decline.

These upward revisions were partially offset by a larger slowdown in inventory investment. The change in private inventories was revised to a 0.22 percentage point drag from the previous reading of a 0.14 percentage point drag on growth.

The revisions turned government spending positive, rising at a 0.1% pace due to a smaller decline at the state and local level than previously expected.

Many economists expect growth to pick up slightly in the first quarter, although the signals are mixed. The Commerce Department’s broad measure of consumer spending showed a healthy gain in January, but retail sales were lackluster for the first two months of the year. Durable goods orders, a measure of manufacturing demand, fell sharply in February after a sharp increase in January, the Commerce Department said Thursday.

Following Friday’s report, forecasting firm Macroeconomic Advisers maintained its projection of 1.5% annualized growth in the first quarter.

Write to Eric Morath at [email protected]

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