U.S. Economic Growth Improves Despite Plummeting Corporate Profits

June 29, 2016United Statesby EW News Desk Team

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Corporations are making less money than they used to, but America’s economic growth gained a bit of ground earlier in the year.  Corporate profits fell 4.3% on a year-over-year basis in the first quarter, according to a new study by the Bureau of Economic Analysis (BEA). Meanwhile, taxes on corporate income rose by $4.4 billion, as a shift towards higher tax industries caused government inlays to improve.

The weakness in domestic companies was across industries, but financial firms suffered the most, with a $10.7 billion decline in profits on a quarter-over-quarter basis. That offset an increase in nonfinancial profits of $75.3 billion on a quarter-over-quarter basis, driven largely by higher oil prices improving energy company profitability.

The growth of nonfinancial profits is a net plus for America’s GDP, helping the country’s GDP to rise by 1.1% in the first quarter. That is a new estimate far above prior estimates of 0.8% and 1% by the BEA, driven largely by higher demand from local governments and a robust recovery in consumer spending.

A prior study that showed retail sales rose by 8% in the first quarter was confirmed by the BEA’s figures, which saw personal consumption expenditures rise despite weakness in the labor market. Meanwhile, prices have seen only a slight increase on a quarter-over-quarter basis, with the purchases price index rising just 0.2% from the fourth quarter.

Higher Housing Costs, Higher Net Worth

On the backdrop of a small but improving trend towards economic recovery, the U.S. housing market is still booming, with some cities seeing over 10% price increases in April. A new study by S&P of the Case-Shiller U.S. National Home Price Index saw a 5% annual price gain in April after rising 5.1% annually in March. Portland led with 12.3% price growth, followed by Seattle at 10.7%.

S&P Dow Jones Indices Managing Director David M. Blitzer noted the strength has been long running, indicating sustainable demand for homes. "The housing sector continues to turn in a strong price performance with the S&P/Case-Shiller National Index rising at a 5% or greater annual rate for six consecutive months,” he said, adding that low unemployment, low mortgage rates, and rising consumer confidence were driving the price gains.

"One result is that an increasing number of cities have surpassed the high prices seen before the Great Recession. Currently, seven cities – Denver, Dallas, Portland Oregon, San Francisco, Seattle, Charlotte, and Boston – are setting new highs,” he said.

While the report was strong and led to a cheerful outlook for America’s real estate market, Blitzer cautioned that the ever-present risk of Britain’s exit from the European Union could impact America’s housing market. "However, the outlook is not without a lot of uncertainty and some risk. Last week’s vote by Great Britain to leave the European Union is the most recent political concern while the U.S. elections in the fall raise uncertainty and will distract home buyers and investors in the coming months,” Blitzer said.