Corporate Tax

US Company Earnings Soar in Second Quarter; Financial progress elevated

  • Second quarter GDP growth revised to 6.6%
  • Corporate profits rise to new record high
  • Weekly unemployment claims increase by 4,000 to 353,000

WASHINGTON, Aug. 26 (Reuters) – U.S. corporate earnings climbed to a new record high in the second quarter, fueled by robust demand and higher prices, suggesting an expected slowdown in economic growth this quarter due to rising COVID-19. Cases could be temporary.

The leap in profits reported by the Commerce Department on Thursday came despite rising costs for businesses due to a shortage of raw materials and labor. The resurgence of infections caused by the delta variant of the coronavirus is dampening demand for services such as air travel and cruises, leading economists to lower their growth estimates for the third quarter.

“Based on earnings data, any slowdown in growth due to lower consumer spending will likely prove temporary,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

Continuing production profits rose $ 234.5 billion, or a quarterly rate of 9.2 percent, to a record $ 2.8 trillion after rising 5.1 percent in the first quarter. They were driven by a $ 169.8 billion rise in profits in domestic non-financial corporations. There were also gains in the profits of domestic financial firms as well as in profits in the rest of the world.

Pre-tax profit as a percentage of GDP, a proxy for macroeconomic profit margins, rose 0.7 percentage points to 12.3%, the highest value since 2014.

National after-tax profits excluding inventory valuation and capital usage adjustments, which are conceptually most similar to S&P 500 profits, increased $ 303.6 billion, or 12.8%, from 9.4% for the January-March period.

Earnings were up 69.3% year over year, partly exaggerated by low baseline comparisons in the second quarter of 2020 following mandatory closings of non-essential stores.

“Increased margins suggest that corporate profits have not yet been significantly absorbed by higher costs, as companies seem to have more pricing power today than they normally would at this early stage in an expansion,” said Jay Bryson, chief economist at Wells Fargo in Charlotte, North Carolina.

The gross domestic product rose by 6.6% projected over the year, announced the government on Thursday in its second estimate of GDP growth for the period April-June. This has been corrected upwards from the 6.5% expansion rate reported in July.

Economists polled by Reuters had expected GDP growth to rise to 6.7% in the second quarter. The economy grew at a rate of 6.3% in the first quarter, making up for the heavy losses suffered during the two-month COVID-19 recession.

GDP levels are now 0.8% higher than their fourth quarter 2019 high. The upward revisions to GDP growth last quarter reflected a somewhat more robust pace of consumer spending and business investment than originally anticipated. Demand was driven by one-off government stimulus checks on some middle- and low-income households.

The Federal Reserve has maintained its ultra-loose monetary policy stance, keeping interest rates at historically low levels and pushing stock prices higher.

Stocks traded lower. The dollar (.DXY) rose against a basket of currencies. US Treasury bond prices were mostly lower.

GDP

SPEED BUMP

Consumer spending, which accounts for more than two-thirds of the US economy, appears to be cooling off. Credit card information suggests that spending on services such as airfare, cruises, and hotels and motels has slowed.

“This is a speed bump because of the interaction between Delta and supply-side constraints,” said Michelle Meyer, chief US economist at Bank of America Securities in New York. “We still believe the foundation for the economy is solid and all signs point to strong underlying demand.”

Bank of America Securities cut its GDP growth estimate for the third quarter from 7.0% to 4.5%.

An upturn in growth is expected in the fourth quarter, driven in part by the increase in company inventories, which were reduced in the first half of the year due to strong demand. Overall, economists expect growth of around 7% this year, which would be the strongest development since 1984.

Although the stimulus from fiscal stimulus is weakening, demand continues to be supported by a recovering labor market.

A separate Labor Department report on Thursday showed that initial government unemployment benefit claims for the week ending August 21 rose by 4,000 to a seasonally adjusted 353,000.

Adjusting the data for seasonal fluctuations is difficult at this time of year, a task made difficult by the pandemic. That could explain the increase in applications over the past week. Unadjusted claims dropped 11,699 last week to 297,765.

Unemployment claims

Companies cling to their workers amid a labor shortage stemming from a lack of childcare facilities and fears of contracting the virus. At the end of June there was a record 10.1 million vacancies.

At least 25 Republican governor-led states have pulled out of federal government-funded unemployment programs, including a $ 300 weekly payment that companies claim encouraged unemployed Americans to stay home.

However, there is no evidence that the early termination of federal benefits has led to an increase in new hires in these states. The government-funded benefits expire on September 6 and affect more than 11 million people.

“While early termination states have argued that benefits are hindering labor supply, we are finding only a marginal effect,” said Gregory Daco, chief US economist at Oxford Economics in New York. “It seems that the phasing out will put a greater strain on the personal income book of the economy than it will support employment growth.”

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

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