The Economy vs. Earnings: Companies Aren’t Winning

U.S. economy isn’t as weak as the first-quarter GDP report suggests

By Justin Lahart 

The weakness in the GDP data dovetails with the soft first-quarter results many companies reported. An auto worker at a Ford Motor plant in Michigan Photo: Carlos Osorio/Associated Press

The U.S. economy is doing a lot better than advertised. But listening to what companies say, investors might find that hard to believe.

Gross domestic product grew at a 0.8% annual rate in the first quarter, according to revised estimates released by the Commerce Department on Friday. That was better than the initially reported 0.5% rate. But it was still awfully soft, marking the slimmest gain since the first quarter of last year when a harsh winter walloped the economy.

The weakness in the GDP report dovetails with the weak first-quarter results many companies reported. Indeed, the Commerce Department also reported its measure of pretax corporate profits (which unlike GDP aren’t adjusted for inflation) rose just 0.3% from the fourth quarter—1.4% at an annual rate. From a year earlier, profits were down 5.7%.

But GDP seems out of step with other economic reports, suggesting there is something to arguments that there are problems with how the first-quarter figures are getting adjusted for seasonal swings.

Created with Highstock 2.1.5%Out of WhackChange in gross domestic product and gross domestic income from previousquarter at an annual rateChange in gross domestic product and gross domestic income from previous quarter at an annual rateGDPGDI1Q20142Q3Q4Q1Q’152Q3Q4Q1Q’16-2-10123456

For example, the Commerce Department reported that gross domestic income rose at a 2.2% annual rate in the first quarter. In theory, the two measures should foot with one another since one measures expenditures and the other income. When they don’t, research has shown that GDI tends to be the more accurate. Strong employment figures in the first quarter also seem to reflect an economy that is doing better than GDP data shows.

But if GDP isn’t as bad as advertised, why are earnings so weak?

One reason is that the share of the economy going to corporate profits, which has been near historic highs as profit margins expanded, appears to be shifting lower. Another is that profits from abroad—which play an even greater role in public-company earnings reports than in the Commerce Department figures—have been walloped by overseas weakness and dollar strength. Public companies are also more focused in the goods sector, which has been a weaker spot for the economy than services.

In the second quarter, GDP should look a lot better. Macroeconomic Advisers, for one, estimates it will grow at a 2.5% annual rate, based on the data that has come in so far. But considering the profits headwinds, earnings may not see much of a revival.

Companies may have to figure out how to explain away another round of disappointing earnings without relying on a weak economy as a crutch.


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