GDP report: Good for economy, bad for shareholders
Commentary: Profit growth is slowing
03/29 12:24 PM
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WASHINGTON (MarketWatch) -- The third revision of the gross domestic product report usually doesn't make waves unless the headline number changes dramatically. But it's also the first report to include corporate profitability, and here is where the numbers provide evidence of good news for the broader economy, if not for shareholders.
Growth in pretax profit, before adjustments for inventories and other items, slowed from 25% in 2010 to just 4.2% in 2011.
And in every quarter of 2011, profit growth slowed.
Dividend growth also slowed, to 10.3% last year from 18.9% in 2010.
Also, two of the strongest sectors of profit growth came from machinery firms and fabricated metal products, two sectors where profits will slow from here since they benefited from the tailwinds of a need for companies to re-tool following the Great Recession as well as a now-expired tax break that encouraged investment.
What the data show is that all of Corporate America, and not just big multinationals, is having trouble getting more output out of existing employees.
That's not terrible news for the average American, as it implies that companies need to ramp up hiring to boost profits further. So far, they have, with private-sector jobs growth of over 200,000 in each of the last three months. Economists are expecting another 200,000-plus reading in March.
Federal Reserve Chairman Ben Bernanke has been wondering about the disconnect between jobs growth and that of the broader economy -- he's speculated that companies are simply rehiring those they fired during the Great Recession -- but the GDP report also had more good news in it.
While gross domestic product accelerated to 3% from 1.8%, gross domestic income accelerated to 4.4% in the fourth quarter from 2.6%.
In theory, GDP should always equal GDI -- one measures the economy's output by expenditure and the other by income. In practice, that's not the case. But if the GDI data is the one that better captures the underlying economy right now, then the Bernanke puzzle is resolved.
There's no shortages of caveats before getting too excited: the never-ending Europe sovereign debt struggle, China's apparent slowing down, a still-high debt burden for consumers and the prospect of higher interest rates.
And for those involved in the market, the good news could turn bad in the short term if the liquidity flood is turned off. Bernanke seems more inclined to err on the side of letting inflation bubble up than turning the spigot off too quickly, but he is a central banker, after all.
In any case, the GDP data suggest a scary scenario for markets and central bankers alike: the return, perhaps, of normal conditions.
-- Steve Goldstein
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