Corporate profits weaken; modest growth expected for 1999

Although economic growth was encouragingly -- and surprisingly -- strong during the third quarter of 1998, trends in corporate profits would suggest that the long- anticipated slowdown is likely to materialize in coming quarters.
By Staff January 1, 1999

Although economic growth was encouragingly — and surprisingly — strong during the third quarter of 1998, trends in corporate profits would suggest that the long- anticipated slowdown is likely to materialize in coming quarters. Profits before tax decreased $6.5 billion in the third quarter, in contrast to an increase of $4.4 billion in April-June. Profits after tax decreased more sharply during the most recent quarter — by $8.6 billion — after increasing $2.6 billion during the second quarter. After-tax profits have now declined in three of the past four quarters; third-quarter 1998 profits were 6.2% lower than during the same period of 1997.

We now expect that final numbers for 1998 will show after-tax profits declining by about 2% from the 1997 total — the first annual decline in corporate profitability this decade. Our current forecast calls for profit growth of a modest 1.7% during 1999. We can already see some of the impact that lower profits will have on business investment growth in the quarters ahead; total business investment spending (on both plant and equipment) during 1998’s third quarter declined at a 1.2% annual rate, following growth of almost 11% in 1997, and more than 17% during the first half of 1998.

Strong profit growth comes to an abrupt end

(Annual change in after-tax corporate profits)

1990 14.7% 1995 21.9%

1991 4.2% 1996 6.9%

1992 9.4% 1997 7.5%

1993 14.0% 1998 -2.1%*

1994 16.1% 1999 1.7%*

*Forecast

Forecasts: Cahners Economics

Source: U.S. Commerce Department