The second release of GDP for the first quarter came out this morning, and I want to focus today on two interesting components of this release – first, today’s look at corporate profits for the first time this quarter, and second, the revisions to the first (or “advance”) Q1 GDP estimate released last month. Let’s start with corporate profits. Why do we care about profits? Increased corporate profits can help the economy in a number of ways. First, higher profits can boost consumer spending; they can lead to higher dividends (a form of personal income and the April personal income data will be released tomorrow) and higher stock prices (a form of wealth—see this chart). Second, as higher profits help repair and boost corporate balance sheets, businesses may start hiring and investing at a faster pace (recall that the private sector added 854,000 jobs in the first four months of the year).
Since the end of the recession, profits have increased across a number of industries, and in many of these industries, profits now stand higher than their pre-recession levels. The really cool chart below shows how profits are distributed across the economy and where they stand as of the fourth quarter of 2010 (the profit by industry-level detail won’t be released until next month) relative to 2007 (before the recession). The size of the boxes represent distribution across America’s corporate landscape, and the color of the boxes indicate where profits stand relative to 2007, the year before the recession hit (we don’t look at where profits stand relative to the peak because different industries peaked at different times). The darker the blue color, the greater the profits relative to their pre-recession levels. The darker the red color, the lower the profits compared to pre-recession levels.
Overall, domestic corporate profits totaled $1.39 trillion in the first quarter of 2011 at an annual rate, compared to $1.34 trillion in 2007. With that said, always take the profit report from an individual quarter with a grain of salt, as profits on a quarterly basis can be buffeted by tax changes, unanticipated events (i.e., Fannie Mae and Freddie Mac), and other quirky factors.
The second interesting tidbit in today’s release (and this tends to get the most attention) is the revision to Q1’s GDP growth rate: GDP growth was revised from 1.8% as reported last month to … drum roll please … 1.8%. There were a bunch of small revisions within the details of the release, but those revisions offset one another.
~Mark Doms, Chief Economist, U.S. Department of Commerce
May 26, 2011
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