WASHINGTON–Profits at U.S. corporations in late 2014 posted their largest drop in four years, a reflection of an economy weighed down by a strong dollar and weak global demand.
The Commerce Department’s third estimate of fourth-quarter gross domestic product also showed that the economy slowed in the final months of 2014, putting the growth trajectory on a lower path ahead of an apparent slowdown early this year.
GDP, the broadest measure of goods and services produced across the economy, expanded at a seasonally adjusted annual rate of 2.2% in the fourth quarter, the Commerce Department said. That was unchanged from its previous estimate last month. Economists surveyed by The Wall Street Journal had expected an upward revision to 2.4% growth.
Corporate profits after tax–without accounting for the value of inventory and depreciation of buildings and equipment–fell at a 3% pace from the third quarter. That was the largest quarterly drop in profits since the first quarter of 2011.
On a year-over-year basis, the report pegged corporate profit growth at 2.9%, slowing from 5.1% annual growth in the third quarter. As a share of the total economy, corporate profits were just a hair below the record high of 10.5% set in 2013.
Despite the dip, “U.S. corporations continued to drive a healthy bottom-line,” Andrew Wilkinson, an analyst for Interactive Brokers, said in a note to clients. “The dip does, however, suggest some impact on net income from a stronger dollar.”
The overall picture last quarter was reflective of a divergence between consumers and businesses. Consumers spent at the fastest pace since 2006, but business investment has been decelerating for the past several months and government outlays have fallen.
Many economists expect the current quarter to remain sluggish. Several forecasters trimmed their first-quarter GDP estimates earlier this week following a disappointing report on business spending and investment.
Forecasting firm Macroeconomic Advisers lowered its forecast a tenth of a percentage point on Friday, pointing to signs of weaker momentum for consumer spending following the fourth-quarter GDP revisions.
The Commerce Department will release its first estimate of GDP in the first quarter, which ends next week, on April 29.
Despite the uneven growth, the U.S. economy has been advancing at a fast enough pace to add jobs at a strong clip and bring some sidelined workers back into the job market.
But a strengthening U.S. dollar and weak global demand are weighing down the nation’s exports and inflation, while crimping profits for U.S. companies that do business abroad.
Foreign trade was a net drag on growth last quarter, despite an increase in exports. Exports grew at a 4.5% rate in the fourth quarter, up from an earlier estimate of 3.2% growth and matching the third-quarter’s pace, primarily due to more spending on travel and other services as the dollar strength has made overseas visits favorable. Imports rose sharply.
Total exports as a share of GDP have grown steadily over the past several decades, and export stagnation could undermine growth.
Federal Reserve officials are paying increased attention to the strong-dollar effects as they weigh when to begin raising interest rates. Fed Chairwoman Janet Yellen said this month that the strong dollar is probably one reason for weak export growth, but it also reflects the strength of the U.S. economy.
“We do see considerable underlying strength in the U.S. economy and in spite of what looks like a weaker first quarter, we are projecting good performance for the economy,” Ms. Yellen said at a news conference following the Fed’s latest policy meeting.
In the fourth quarter, Friday’s report showed, consumer spending climbed at a seasonally adjusted annual rate of 4.4%, up from an earlier estimate of 4.2%.
But a downward revision to private inventories largely offset the upward revisions to exports and consumer spending.
Business investment–which reflects spending on software, research and development, equipment and structures–grew at a 4.7% rate, slightly lower than last month’s estimate of 4.8% and down from the third quarter’s 8.9% pace.
Government spending contracted at a 1.9% pace, reflecting a sharp drop in federal defense outlays.
The housing market expanded at a modest pace. Residential investment grew at a 3.8% pace in the fourth quarter, up from 3.2% in the third quarter.
Measurements of underlying demand in the economy also showed signs of weakness last quarter. Real final sales of domestic product, a measure that excludes changes to inventories, grew at a 2.3% pace, down from the third quarter’s 5.0% rate.
Despite slower growth in the fourth quarter, growth in the second half of 2014 was still “very solid” and should pick up again in the second half of 2015, PNC economists Stuart Hoffman and Gus Faucher said in a note to clients.
“Solid consumer fundamentals, an improving housing market, expanding business investment, the boost from lower energy prices, and reduced emphasis on government deficit reduction will all support growth this year,” Messrs. Hoffman and Faucher said.
Write to Kate Davidson at email@example.com
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