Corporate Profits Rise as GDP Is Revised Up
Stronger first-quarter performance comes amid signs of stabilizing oil prices, dollar
ENLARGE
Workers assembling a baler at a New Holland factory in New Holland, Pa., on April 8. Photo: Luke Sharrett/Bloomberg News
A key measure of corporate profits—after taxes, without inventory valuation and capital consumption adjustments—rose at a 1.9% pace in the first three months of 2016, the Commerce Department said Friday. That was after dropping at an 8.1% pace in the fourth quarter and a 3.3% decline in the third quarter.
“At least it’s not negative,” said Christine Short, senior vice president at analytics firm Estimize, though she added that the profit rebound is “still nothing to write home about.”
The broader economy seems on track to rebound after a weak performance over the past few quarters. Gross domestic product, a broad measure of goods and services produced across the U.S. economy, expanded at a 0.8% seasonally adjusted annual rate in the first three months of 2016, the Commerce Department said in updated figures out Friday. That was up from an initial estimate of 0.5% growth but still represented a deceleration from the fourth quarter’s 1.4% growth rate.
The resilience of corporate profits in the months ahead will be key to supporting the stock market, which has returned near the all-time highs reached last spring. It’s also critical to firms’ ability to hire workers and invest in new equipment and facilities.
Company earnings should be falling or flat on an annual basis over the next two quarters, but are expected to turn positive late this year, said Ms. Short. Rising oil prices and a stable dollar, she said, are set to be “a tremendous help.”
Crude prices touched $50 a barrel this past week for the first time since last year, propelled by the most powerful rally in seven years. Higher prices are set to ease pressure on energy firms that have shed workers and pulled back on drilling across the oil patch over the past two years.
The dollar, meanwhile, has been more or less stable over the past year after rising sharply against other major currencies in late 2014 and early 2015 as the Federal Reserve prepared to begin raising short-term interest rates. A stronger dollar has made U.S.-made products more expensive for foreign customers, reducing demand for exports and squeezing the domestic manufacturing sector.
The worst may be over from the oil downturn and effects of a strong dollar. But a tightening labor market is pushing up wages "and that probably is cutting into margins” more broadly, said Jesse Edgerton, a J.P. Morgan Chase economist.
That could prompt Fed officials to support a second increase in short-term interest rates. The U.S. central bank in December raised its benchmark federal-funds rate, which had been pinned near zero for seven years, to a range of 0.25% to 0.5%. Since then, policy makers have exercised caution in the face of worries about global growth and volatile financial markets.
The Fed has recently signaled that a move may come at its upcoming meetings on June 14-15 or July 26-27. Investors on Friday pegged the odds of a rate increase in June or July at 56%, according to fed-fund futures tracked by CME Group.
Fed Chairwoman Janet Yellen said Friday that “probably in the coming months such a move would be appropriate” if certain conditions are met, including an improvement in economic growth.
“We saw weak growth in the first quarter of the year and relatively weak growth at the end of last year,” she said during an event at Harvard University. “Growth looks to be picking up, from the various data that we monitor.”
Household outlays, the housing sector and spending by state and local governments all provided positive contributions to output growth in the first quarter. Business investment, inventories and foreign trade were all drags on growth.
Business spending remains a sore spot. The Commerce Department this week reported that April saw a decline in a key proxy for capital spending, orders for long-lasting civilian capital goods excluding aircraft. That came after the first quarter saw the steepest decline in fixed nonresidential investment -- a metric of U.S. business spending -- since the tail end of the 2007-2009 recession, including sharply lower spending on structures and equipment.
Chico’s FAS Inc. said this past week that same-store sales fell 4.2% from a year earlier in the three months ended April 30. The Fort Myers, Fla.-based women’s apparel retailer said it plans to scale back capital expenditures for this year and close dozens of stores. “In this challenging environment, we are allocating our resources prudently,” Chief Financial Officer Todd Vogensen told analysts Thursday.
Consumers seem to be in better shape. The unemployment rate in April was 5%, half the level seen in the recession’s immediate aftermath, and long-sluggish wage growth has firmed by some measures. Consumer spending expanded at a 1.9% rate in the first quarter, and retail sales jumped in April at the fastest pace in a year. The University of Michigan on Friday reported its index of consumer sentiment rose to 94.7 in May, the highest level in 11 months.
The pace of job gains, though, may be slowing. Nonfarm employers added 160,000 jobs in April, a deceleration from the first quarter’s monthly average of 203,000, according to Labor Department data.
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
