This morning, the Bureau of Economic Analysis lowered its estimate for Q1 GDP to +2.4%, from an earlier reading of +2.5%.
Among the interesting details was corporate profits after tax, which came in at -1.9%. Economists were looking for +0.2%. This was the first negative reading since Q1 2012.
One of the big concerns in the markets today is that stocks have trended higher even as earnings growth expectations have stagnated.
While U.S. corporate profits are not the same as S&P 500 corporate profits, today’s report is nevertheless worrisome as the U.S. has been one of the healthier economies in the developed world.
Here’s the table and text from the BEA:
Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $43.8 billion in the first quarter, in contrast to an increase of $45.4 billion in the fourth. Current-production cash flow (net cash flow with inventory valuation adjustment) – – the internal funds available to corporations for investment — increased $110.9 billion in the first quarter, in contrast to a decrease of $89.8 billion in the fourth.
Taxes on corporate income decreased $13.6 billion in the first quarter, compared with a decrease of $4.4 billion in the fourth. Profits after tax with inventory valuation and capital consumption adjustments decreased $30.2 billion in the first quarter, in contrast to an increase of $49.8 billion in the fourth. Dividends decreased $101.7 billion in contrast to an increase of $124.3 billion. The large fourth-quarter increase reflected accelerated and special dividends paid by corporations at the end of 2012 in anticipation of changes to individual income tax rates. Current-production undistributed profits increased $71.4 billion, in contrast to a decrease of $74.3 billion.
Domestic profits of financial corporations decreased $2.0 billion in the first quarter, compared with a decrease of $3.5 billion in the fourth. Domestic profits of nonfinancial corporations decreased $8.8 billion in the first quarter, in contrast to an increase of $24.8 billion in the fourth. In the first quarter, real gross value added of nonfinancial corporations increased, and profits per unit of real value added decreased. The decrease in unit profits reflected an increase in the unit nonlabor costs incurred by corporations that was partly offset by a decrease in unit labour costs; unit prices were unchanged.
The rest-of-the-world component of profits decreased $33.0 billion in the first quarter, in contrast to an increase of $24.1 billion in the fourth. This measure is calculated as (1) receipts by U.S. residents of earnings from their foreign affiliates plus dividends received by U.S. residents from unaffiliated foreign corporations minus (2) payments by U.S. affiliates of earnings to their foreign parents plus dividends paid by U.S. corporations to unaffiliated foreign residents. The first-quarter decrease was accounted for by a decrease in receipts and an increase in payments.
Profits before tax decreased $49.8 billion in the first quarter, in contrast to an increase of $27.3 billion in the fourth. The before-tax measure of profits does not reflect, as does profits from current production, the capital consumption and inventory valuation adjustments. These adjustments convert depreciation of fixed assets and inventory withdrawals reported on a tax-return, historical-cost basis to the current-cost measures used in the national income and product accounts. The capital consumption adjustment increased $12.9 billion in the first quarter (from -$199.5 billion to -$186.6 billion), compared with an increase of $0.5 billion in the fourth. The inventory valuation adjustment decreased $6.9 billion (from -$9.2 billion to -$16.1 billion), in contrast to an increase of $17.6 billion.
The first-quarter changes in taxes on corporate income and in the capital consumption adjustment mainly reflect the expiration of bonus depreciation claimed under the American Taxpayer Relief Act of 2012. For detailed data, see the table “Net Effects of the Tax Acts of 2002, 2003, 2008, 2009, 2010, and 2012 on Selected Measures of Corporate Profits” at www.bea.gov/national/xls/technote_tax_acts.xls. Profits from current production are not affected because they do not depend on the depreciation-accounting practices used for federal income tax returns; rather, they are based on depreciation of fixed assets valued at current cost using consistent depreciation profiles based on used-asset prices. For more details on the effect of tax act provisions on the capital consumption adjustment, see FAQ #999 on the BEA Web site, “Why does the capital consumption adjustment for domestic business decline so much in the first quarter of 2012?”.