First Quarter Economic Growth Confirmed

The Bureau of Economic Analysis (BEA) reported that economic growth, measured by the annualized growth rate of real GDP, was revised to 2.2 percent from the advance estimate of 2.3 percent. The modest downward revision confirms the extent of economic growth over the first quarter of the year.

The second estimate of first quarter GDP also included the first estimate of corporate profits. According to the release, corporate profits fell, reflecting a decline in taxes on corporate income. In contrast, after-tax profits rose, reflecting an increase in corporate saving. The increase in corporate saving was partially offset by a decline in net dividends; payments in cash or other assets, excluding the corporation’s own stock, made by corporations located in the US and abroad to stockholders who are U.S. residents. While early evidence suggests that demand for C&I loans was weaker on net in the first quarter, banks also indicated that this could have partially been due to the increased use of internally generated funds.

The first quarter estimate of GDP growth was marked down modestly, from 2.3 percent to 2.2 percent. An expenditures approach illustrates that the growth in each major component of the economy except imports was revised slightly downward. In contrast, import growth was revised upward. However, imports are subtracted from GDP, so the upward revision to import growth lowers GDP growth. Despite the downward revision, the strength of economic growth over the first quarter was confirmed for the time being.

In addition, the second estimate released by the BEA also provides first information on corporate profits. Corporate profits reflect the sum of the taxes paid on corporate income and after-tax profits. As illustrated by the figure above, corporate profits fell by 0.9 percent to $1.75 trillion. However, the decline reflected a 26.3 percent drop in taxes on corporate profits. In contrast, after-tax profits rose by 7.6 percent to $1.4 trillion.

The increase in after-tax profits reflected a 274.9 percent increase in undistributed corporate profits to $1.6 trillion. According to the BEA, undistributed corporate profits measures corporate saving from profits. Meanwhile, net dividends fell from $890.7 billion to -$203.4 billion. Net dividends consists of payments in cash or other assets, excluding the corporation’s own stock, made by corporations located in the United States and abroad to stockholders who are U.S. residents. The payments are netted against dividends received by U.S. corporations, thereby providing a measure of the dividends paid by U.S. corporations to other sectors. Dividends from the rest of the world (Table 4.1) rose from $276.6 billion in the fourth quarter of 2017 to $1.4 trillion in the first quarter of 2018.

The information provided in the second release indicates that the taxes paid on corporate income fell over the quarter. According to the BEA, “the decline reflected a reduction in the federal domestic corporate income tax rate that decreased from 35 to 21 percent, which took effect on January 1, 2018.” In addition, net dividends declined, “reflecting an increase in dividends received from the rest of the world”. According to the BEA, “The large increase in dividends received from the rest of the world was based on preliminary data from BEA’s International Transactions Accounts and reflected changes in U.S. tax law that eliminated taxes on repatriated profits to U.S. multinationals from their affiliates abroad”.

According to the BEA, “Because BEA’s featured measure of corporate profits reflects profits before subtracting taxes and payments to shareholders, GDI [a measure of the economy similar to GDP] was not directly impacted by the TCJA”. However, the compositional shift away from taxes on corporate income and toward corporate profits could impact future economic growth, especially given that the growth in after-tax corporate profits reflected an increase in corporate saving, which could ultimately be deployed as business expenditures. NAHB analysis of the the Senior Loan Officer Opinion Survey found that demand for commercial and industrial (C&I) loans was weaker on net in the first quarter, but banks indicated that this could partially reflect the possibility that the use of internally generated funds had increased.



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