Second Quarter GDP: Beyond the Headlines
On July 26, the Commerce Department’s Bureau of Economic Analysis (BEA) released its advance estimate of GDP for the second quarter of 2019. As many business news headlines noted, the economy’s growth rate declined to 2.1% from the first quarter’s 3.1%, although the reported 2.1% was higher than most forecasts predicted. The Atlanta Fed’s GDPNow prediction, based on a dynamic model developed by the bank, was 1.3%.
However, the details published in the various BEA tables provides significantly greater insight into what is transpiring in the U.S. economy and what factors drove the overall 2.1% growth rate. The growth figure was better than the consensus estimate of 1.8% despite facing tariff war and a slowing global economy. Contributors to growth included strong personal consumption growth of 4.3% and government spending (highlighted in particular by federal nondefense spending growth of 15.9%) and that were countered by negative growth in private inventory investment, exports, nonresidential fixed investment and residential fixed investment.
BEA simultaneously publishes additional tables of figures on various sectors of the economy for the first quarter of 2019. These tables provide detail on metrics of interest to the business community, including a breakdown of corporate profits and extensive detail on the economic value added contributed by nonfinancial corporate businesses, along with price per unit data on such things as compensation, capital, taxes, etc.
The detail on corporate profits is revealing. Looking at overall corporate profit levels, the reported data for Q1-2019 showed a slight decline on an annualized basis of 3.8% from Q4-2018, for a total profit figure of $2.007 trillion.1 This figure represents 8.5% of GDP, which is below the post-recession average of 9.3% but is higher than the postwar average of 6.7%.
The GDP data also provides additional insights into the disposition of corporate profits. The share of corporate profits that are distributed as dividends has averaged 53.1% in the period since the end of 2007 and has since risen consistently following the end of the recession. Dividends currently represent 66% of corporate profits as of Q1-2019. Note that as corporate profits fell significantly during the financial crisis, adjustments to dividend payouts lagged somewhat, resulting in dividends representing of 75% of profits in Q4-2008. In response to rapidly changing financial and economic conditions, corporate boards quickly reduced payouts to shareholders, which declined rapidly to 36% of profits in Q4 of 2009, as shown in Figure 2.
For example, in addition to providing a top-line corporate profit figure, the BEA provides details on the contributions of various components of the economy. As shown in Figure 3, the largest contributor to overall corporate profits was non-domestic corporations, followed by “other nonfinancial.”
The chemical products segment produced $52 billion in profits, although the sector’s overall profitability was down over 19% from Q4-2018.3
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1 Corporate profits with inventory valuation and capital consumption adjustments.
2 These figures are annualized and seasonally adjusted.
3 These figures are annualized and seasonally adjusted.