Q4 GDP growth was downwardly revised to 2.2%. The revised release showed the U.S. economy continued to create income at a solid pace. But, we expect corporate profit growth will slow meaningfully going forward.
Revised Data Continue to Show Deceleration in the Economy
Revised data this morning showed that real GDP grew at an annualized rate of 2.2% in Q4-2018, down from the initial estimate of 2.6% (top chart). Almost all major categories contributed to this downward revision—with the one notable exception being net exports.
The broad weakness in the retail environment at the end of last year caused consumer spending to increase only 2.5%, down from the initial 2.8% estimate, with the weakness concentrated in goods consumption. Fixed investment also saw smaller increases than initially reported in both the nonresidential and residential components of spending. But, a smaller increase in imports resulted in a more modest drag from net exports than previously reported.
In general, today’s GDP release continues to show that the rate of economic growth in the United States has downshifted a bit over the past few quarters. Our current forecast looks for further deceleration in the first quarter, but we then look for a modest rebound starting in Q2.
Gross Domestic Income & Corporate Profits
As usual, the first estimate of GDP—Q4 GDP was initially released a month ago—did not show the income side of the National Income and Product Accounts (NIPA). The revised data released today included the income side of the NIPA. Specifically, real gross domestic income (GDI) rose at an annualized rate of 1.7% in the fourth quarter—which came on the heels of a 4.6% jump in Q3—but kept its year-over-year growth rate at 2.7% (middle chart). On a nominal basis, GDI was up 5.0%, with growth driven by wages and salaries (up 4.6%), proprietors’ income (nearly 6%) and dividends (6.5%). In general, the data show that the U.S. economy continued to create income at a solid rate in the fourth quarter of last year.
The data also included the first look at economy-wide corporate profits in the fourth quarter. On a pre-tax basis, corporate profits were up 7.4% on a year-ago basis in Q4, down modestly from roughly 10% growth in the third quarter. After tax, profits grew 14.3% (bottom chart). Corporations experienced strong profit growth in 2018, due in part to strong domestic growth, but largely due to decreased corporate tax rates. Indeed, after-tax profits rose at their fastest pace since 2010 while pre-tax profits only saw their fastest pace of growth since 2012. But, as we have noted previously, we look for profit growth to slow meaningfully going forward as the one-time boost to after-tax profits from changes to the corporate tax code fade and as the effects of economic deceleration filter through to the bottom line.
The deceleration in GDP growth this year will weigh on corporate profit growth, while increased labor costs pose a threat to margins. We look for corporate profits to continue to rise this year, albeit at a more moderate pace.
