Concerns over US GDP data

Encouraging growth: Shoppers try on hats for sale at the Third Street Promenade in Santa Monica, California. Consumer spending rose more than previously thought in the US in the fourth quarter. – Bloomberg

Consumer spending rises but corporate profits fall in fourth quarter update

WASHINGTON: On the face of it, the latest government update on how the US economy performed in the fourth quarter looked a bit more encouraging.

Growth was revised to a 1.4% annualised pace from a previously estimated 1%, and the adjustment to gross domestic product (GDP) was for a good reason -- consumer spending rose more than previously thought.

Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5% in the fourth quarter from the year ago, the biggest drop since a 31% collapse at the end of 2008 during the height of the financial crisis.

For 2015 as a whole, pre-tax earnings fell 3.1%, the most in seven years, according to the Commerce Department.

That’s “bad news,” said Nariman Behravesh, chief economist for IHS Inc in Lexington, Massachusetts.

History shows that when earnings fall, the economy often follows them downwards into recession as profit-starved companies cut back on hiring and investment.

There are, however, some caveats to such a gloomy conclusion. Last quarter’s numbers were unusually depressed by a US$20.8bil penalty payment by BP Plc to settle claims over the 2010 oil spill in the Gulf of Mexico.

Taking that into account, earnings fell about 7.6%, according to Bloomberg calculations. That’s still weak but not as bad as the 11.5% slump.

Behravesh also pointed out that the decline was heavily concentrated in the petroleum and coal industries, where profits plummeted by more 75% in 2015 as energy prices collapsed.

That makes it less worrying from the point of view of the overall economy.

“Greater profits are a growth engine for the economy, but we are looking past this data today as it seems to be related to the big decline in oil,” Chris Rupkey, chief financial economist with Bank of Tokyo Mitsubishi UFJ Ltd in New York, said in an e-mail.

Jesse Edgerton, an economist with JPMorgan Chase & Co in New York, was less sanguine.

Yes, the poor earnings outturn was due to energy companies struggling with lower oil prices and manufacturers hit by a strong dollar, he said.

“But it also likely reflects the beginnings of a profit-margin squeeze driven by tighter labour markets, rising wages and weak productivity,” he added in an e-mail to clients.

And that, he suggested, is something to fear. – Bloomberg