Corporate Profits Fell Sharply in Early 2001

Corporate profits fell sharply during the first quarter of this year, the second consecutive quarter of earnings deterioration. Although profits increased during nine of the past 10 years, there's now little question that 2001 will be one of those rare "down" periods.

Consequently, despite lower interest rates across the economy, less money now is available for investment in new equipment and buildings. Not surprisingly, we've seen little or no growth in business capital spending over the first half of 2001.

The U.S. government recently reported that corporate profits from current production (i.e. profits before taxes, but reflecting adjustments for inventory valuation and capital consumption) decreased by $45.7 billion (5.0%) during Q1 2001 after falling by $55.6 billion (a drop of 5.7% from the prior quarter) during the final quarter of last year. This dismal earnings picture follows corporate profit growth of 5.0% in 1999 and a sizzling 10.5% during full-year 2000.

Profits from domestic operations decreased by 3.8% during the most recent quarter, following a plunge of 8.8% during Q4 2000. In contrast, the rest-of-the-world component of prices increased by a whopping 12.2% in the fourth quarter of last year, but plunged by 10.5% during January-through-March 2001. A strong dollar coupled with weakening economic conditions in most of our major trading partners drove exports lower during the early months of 2001 and eroded the profitability of the overseas operations of U.S. companies.

The decrease in profits over the past two quarters also reflects the lack of pricing power among U.S. firms across an increasing number of product sectors. Average prices that companies have been receiving for their products has been increasing more slowly than the escalating labor (wages, benefits, government contributions) and non-labor (energy, transportation, material input) costs being faced by U.S.-based firms.

This material is specially compiled for Graphic Arts Monthly by Delano Data Insights, which provides economic analysis and forecasts via newsletters and reports covering a variety of industry sectors. For more information, contact Daryl Delano, 30 Flintlocke Drive, Plymouth, Mass. 02360, telephone (508) 746-7180.