U.S. Corporate Profits Kept Climbing at End of 2009

By SARA MURRAY

The government, in the broadest tally of corporate earnings, said profits grew smartly in the fourth quarter as the economy bounded from a deep recession.



Pretax profits rose 8% to a seasonally adjusted $1.5 trillion annual rate in the fourth quarter from the third quarter, the Commerce Department said Friday, as it released a slight downward revision to its estimate of fourth-quarter economic growth.



Gross domestic product, the value of all the goods and services produced by the U.S., grew at a 5.6% inflation-adjusted annual rate. The change reflected weaker than previously estimated business and residential investment, as construction spending declined. Economists are expecting more modest growth for the first quarter, with most estimates around 2.8%.



.While conditions are clearly improving for companies, consumers still aren't yet confident in the economic recovery. An index of consumer sentiment remained flat at 73.6 in March from the prior month, the University of Michigan and Reuters said Friday. Consumers' gauge of current conditions improved slightly but their optimism about where the economy is headed declined. "It is unlikely that sentiment will improve to truly optimistic levels until robust job creation returns and home prices stabilize," said Steven Wood, an Insight Economics LLC analyst.



The 8% quarterly increase in profits, which isn't adjusted for inflation, followed a 10.8% increase in the third quarter. Profits were fueled by an increase in output, as companies replenished inventories, and little change in compensation costs, as companies got more productivity from workers.



The combination pushed pretax profits 30.6% higher than a year earlier—the biggest increase in 25 years—but from the low $1.1 trillion annual rate in late 2008, when the financial crisis mushroomed. For the full-year 2009, profits were down 3.8% from 2008.



.In the fourth quarter, companies' profits from domestic operations climbed $124.7 billion, while profits from the rest of the world dropped $16.1 billion.



Rising profits are a boon for stock market investors, but not a guarantee that companies will use improved earnings for widespread capital spending projects and hiring. "Are we going to see hiring pick up and the money start to flow through the economy?" said Joshua Shapiro, a MFR Inc. economist, "That's obviously the great hope." Still, he said, "I think they're going to be a bit cautious."



Government stimulus has been responsible for propping up much of recent demand. However, recent data suggest strength in business purchases of equipment, computers and software.



After-tax profits increased 6.5% in the fourth quarter and were up 22.8% from a year ago. Taxes on corporate income rose 12.7% in the fourth quarter and were 62.1% higher than a year ago.



The increase in fourth-quarter profits was split nearly evenly between both domestic financial and nonfinancial companies. For all of 2009, however, profits at financial companies were up $45.2 billion, compared with a $31.3 billion decline among nonfinancial businesses.



Durable-goods manufacturers, which are highly influenced by the inventory cycle, had a particularly strong quarter, as did information technology companies.



Gross domestic income, which is a measure of total income in the economy, offered a brighter picture for the fourth quarter. It grew at a 6.2% annual rate, after falling 0.4% in the third quarter, when GDP grew 2.2%.



GDP measures output by adding together expenditures, such as consumption, government spending, investment and exports. Gross domestic income is the sum of all the income received in the economy. In theory, the two measures should be equal, but some recent Federal Reserve research has suggested that income may be the more accurate measure. Gross domestic income took a bigger hit during the recession than GDP, but the uptick in the fourth quarter was a promising indication that the recovery is on track and improvements in the labor market may lie ahead.