Economic Growth 0.6 Percent at End of 2007; Corporate Profits Shrink

MBA (3/28/2008 ) Velz, Orawin
The final estimate of economic growth in the fourth quarter of last year was just 0.6 percent, unchanged from earlier estimates, according to the Bureau of Economic Analysis’ final estimate of gross domestic product. (Unless otherwise noted, data reported here are seasonally-adjusted annualized rates.)
Upward revisions to consumer spending on services more than offset downward revisions to spending on durable and nondurable goods, resulting in an upward adjustment in real (inflation-adjusted) personal consumption expenditures (PCE) growth to 2.3 percent from 2.0 percent. Additionally, inventory investment and nonresidential business investment were revised downward while net exports were revised upward.

Revisions to inflation were favorable. The Fed’s favored measure of inflation, the core PCE deflator, was downwardly revised to 2.5 percent from 2.7 percent in the preliminary estimate.

The report contained new data on corporate profits. Profits from current production were $1.569 trillion (annualized) in the fourth quarter, a decline of $52.9 billion from the third quarter (or a 3.3 percent decline). This was the second consecutive decline in profits and the first time that has happened since the first quarter of 2001.

For all of 2007, corporate profits rose 2.7 percent from 2006, a marked slowdown from a 13.2 percent gain in the previous year and the slowest annual growth since 2001. Excluding profits earned by U.S. corporations from foreign corporations, domestic profits fell 3.0 percent in 2007. Declining corporate profits bode ill for firms’ hiring and capital spending plans. Shrinking profits were not only a result of problems faced by the financial sector. While financial sector profits fell 1.8 percent for the year—the first decrease since 1998—nonfinancial sector profits also declined 3.7 percent, the first drop since 2001.

Recent economic reports, including employment, retail sales, consumer confidence and durable goods orders, point to even slower economic growth for the current quarter. In his speech yesterday to the Rotary Club of Chattanooga, Tenn., Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy appears to be on the edge of recession with “little, if any, growth” this quarter. He expects a recovery in the second half of the year; however, it may be slower than anticipated or delayed as the negative impacts of the housing downturn and financial turmoil on household and business spending could persist through the rest of the year.

It appeared that Lockhart, who is not currently a voting member of the Federal Open Market Committee (FOMC), has grown more pessimistic in recent weeks. In his earlier speech to the Rotary Club of Atlanta on March 7, He predicted “a slowing but growing economy at this stage.”

Long-term interest rates rose modestly. The yield on the 10-year Treasury note was 4.54 percent on Thursday afternoon. Fed funds futures put the odds of a 50-basis point cut in the funds rate at more than 75 percent at the next FOMC meeting the end of April.