US Q3 GDP: Good corporate figures - Wells Fargo

Corporations enjoyed higher profit growth in Q3 compared to Q2 of this year, according to analysts from Wells Fargo. They warn that profits as a percent of nominal GDP appeared to have peaked in this cycle, which suggests caution on the outlook.

Key Quotes: 

“With third-quarter growth upwardly revised from 3.0 to 3.3 percent, annualized, the second release of Q3 GDP reveals good corporate profit figures. Corporate profits increased $91.6 billion, compared to an increase of just $14.4 billion in the second quarter of the year. Profits after tax, with inventory and capital adjustments, were up 5.8 percent over last quarter.”

“Foreign profits show altered behavior since the end of the Great Recession compared to the previous economic cycle. That is, average foreign profits since the Great Recession are $402.7 billion, which is higher than the previous cycle average of $229.8 billion and likely, in part, attributable to the increased effects of corporate globalization and better global growth.“

“Corporate profits as a percent of nominal GDP appear to have flattened in the current cycle, which may warrant increased caution. As in past business cycles, the profit to GDP ratio tends to increase in the early to mid-point of a business cycle and then peak. A peak in the corporate profits series usually happens around the mid-point of an economic expansion, which further points to increased caution as we slow from peaks experienced last year. However, confidence remains high among firms. Withan increase of 13.9 percent over the quarter in undistributed profits, firms  appear optimistic in the current administration’s plans for corporate and individual tax cuts, which should spur growth.”

“Corporate profits have experienced healthy growth in Q2 and Q3 of this year. Foreign profits have tended to lead the profits growth for the past year or so. Moreover, nonfinancial corporations are continuously dominating the domestic profits share, compared to financial institutions. Given our forecast of positive GDP growth for the next couple of years, we expect to see positive profits growth, on average, at this time.”