The Economy

U.S. Corporate Profits Fall 8.1% in 4th Quarter

The slowdown in GDP growth was less than previously estimated but corporate profits continue to be hit by a strong dollar and cheap oil.
Katie Kuehner-HebertMarch 25, 2016

U.S. economic growth did not slow as sharply in the fourth quarter as previously estimated but corporate profits fell for a second straight quarter on a strengthening dollar and low oil prices.

Gross domestic product increased at a 1.4% seasonally adjusted annual rate in the fourth quarter, the Commerce Department said Friday. The upward revision from last month’s estimate of 1% growth largely reflected higher consumer spending on services.

“The consumer is back in the driver’s seat,” Chris Rupkey, chief economist at MUFG Union Bank, told Reuters. “There is no sign of recession in these data so this will put a smile on Fed officials’ faces and argues for their policy of gradual interest rate normalization to continue.”

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But corporate balance sheets weakened in the fourth quarter, with profits after tax, without inventory valuation and capital consumption adjustments, falling at an annualized rate of 8.1%  from the third  the largest quarterly decline since the first quarter of 2011.

Year-over-year, corporate profits declined 3.6% in the fourth quarter, but for all of 2015, profits were up 3.3% from 2014.

After-tax adjusted profits, which more closely reflect profits on production during the quarter, fell 15% in the fourth quarter from a year earlier, the steepest year-over-year drop since 2008. The largest profit decline came in manufacturing, especially in production of petroleum and coal products.

“This poor performance reflects energy firms struggling with lower oil prices and manufacturing firms hit by the strong dollar,” said Jesse Edgerton, an economist at JPMorgan in New York. “But it also likely reflects the beginnings of a profit margin squeeze driven by tighter labor markets, rising wages, and weak productivity growth.”

According to The Wall Street Journal, many economists expect growth to accelerate slightly in the first quarter. The revised fourth-quarter data showed consumer spending rose at a 2.4% rate, up from the prior reading of 2%.

“Solid consumer spending — which drives two-thirds of U.S. economic output — is vital to growth given an uneven global economy presents challenges to manufacturers and other businesses with overseas customers,” the WSJ said.

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