Corporate profits rebound, yet U.S. GDP growth decelerates for third straight quarter

Although corporate profits picked up steam in the first quarter, strong business and labor growth was still unable to lift the nation’s economy out of the continued slump that began in the second half of 2015.

Real gross domestic product – the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes – increased at a modest annual rate of 1.1% in the third quarter of 2015, according to the “third” estimate released by the Bureau of Economic Analysis today (June 28) just ahead of the long Fourth of July weekend.

The tepid business expansion confirms now that the world’s largest economy has decelerated for the third straight quarter, giving fears in some quarters that the U.S. is headed toward another recession in the midst of the Brexit fallout that is pounding international financial markets and eroded more than a trillion dollars of market cap in U.S. companies.

The revised first quarter GDP report for 2016 follows last week’s market-shattering vote by the United Kingdom to exit the European Commission, which is also likely to drag down U.S. growth in the second quarter that ends on June 30. Last week, in its decision not to raise U.S. interest rates, the Federal Open Market Committee offered a dour and accommodative stance for the near-term.

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the FOMC said in a June 15 statement. “The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Still, the third and final GDP report for the three-month period ended March 31 shows U.S. economic growth was three percentage points better than the second revision of 0.8% on May 27, and six percentage points better than the fragile first advance estimate of 0.5% on April 28.

Since the second quarter of 2015, when real U.S. GDP accelerated at a robust 3.9%, the U.S. economy has slowed considerably to 2% in the third quarter and to a tepid 1.4% in the fourth quarter.

Today’s GDP estimate is based on more complete source data than was available for the “second” estimate issued last month. BEA officials added this frank assessment: “With the third estimate for the first quarter, the general picture of economic growth remains the same.”

Overall, the increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, state and local government spending, and exports that were partly offset by negative contributions from nonresidential fixed investment, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The deceleration in real GDP in the first quarter primarily reflected a deceleration in PCE, a larger decrease in nonresidential fixed investment, and a downturn in federal government spending that were partly offset by upturns in state and local government spending and exports and an acceleration in residential fixed investment.

Real gross domestic income (GDI), which measures the value of the production of goods and services in the United States as the costs incurred and the incomes earned in production, increased 2.9% in the first quarter, compared with an increase of 1.9% in the fourth. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2% in the first quarter, compared with an increase of 1.7% in the fourth.

Real gross domestic purchases – purchases by U.S. residents of goods and services wherever produced – increased 0.9% in the first quarter, compared with an increase of 1.5% in the previous three-month period.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.2% in the first quarter, compared with an increase of 0.4% in the fourth. Excluding food and energy prices, the price index for gross domestic purchases increased 1.4%, compared with an increase of one percent.

Current-dollar GDP – the market value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production – increased 1.4%, or $65.3 billion, in the first quarter to a level of $18.2 trillion. In the fourth quarter, current-dollar GDP increased 2.3%, or $104.6 billion.

1Q CORPORATE PROFITS RISE TO NEARLY $35 BILLION 

Meanwhile, profits from current production (corporate profits with inventory valuation adjustment and capital consumption adjustment) increased $34.7 billion in the first quarter, in contrast to a decrease of $159.6 billion in the fourth.

Profits of domestic financial corporations decreased $11.3 billion in the first quarter, compared with a decrease of $24 billion in the fourth. Profits of domestic nonfinancial corporations increased $72.9 billion, in contrast to a decrease of $129.2 billion. The rest-of-the-world component of profits decreased $26.9 billion, compared with a decrease of $6.5 billion.

In the first quarter, receipts increased $8.7 billion, and payments increased $35.6 billion. Taxes on corporate income increased $4.4 billion in the first quarter, compared to a decline of $32.2 billion in the previous quarter. Profits after tax increased $30.3 billion versus $127.4 billion in the final three months of 2015.

Dividends increased $8.2 billion in the first quarter, in contrast to a decrease of $15.1 billion in the fourth quarter. Undistributed profits increased $22.1 billion, in contrast to a decrease of $112.2 billion. Net cash flow increased $33.6 billion, in contrast to a decrease of $101.6 billion.

The BEA is expected to release its “advance” estimate for the second quarter on July 29. According to the Atlanta Fed’s GDPNow weekly forecast, real GDP growth in the second quarter of 2016 is expected to pick up momentum with growth of 2.6%. However, that forecast is two-tenths of a percentage point below the previous forecast of 2.8% on June 17, which was taken before the Brexit vote on Friday.