Corporate Profits Fell In Final Months of 2000

Corporate profits fell sharply during Q4 2000 after recording solid growth during the spring and summer, and for nine of the past 10 years. It's clear from the anecdotal evidence coming out of company earnings reports that the profit picture deteriorated further during the first quarter of the year. Consequently, despite lower interest rates across the economy, less money is now available for investment in new equipment and buildings. And with less investment of this sort coming out of the nation's business sector, the economy will almost surely continue to weaken over the next few quarters, eventually further bringing down growth rates in the consumer sectors—a mirror image of the virtuous circle of economic forces that helped propel the U.S. to its longest period of economic expansion in history.

The government reported that corporate profits from current production decreased by $55.6 billion during Q4 2000 after increasing by 6.7% during Q3. Profits from domestic operations decreased by about $73 billion over the quarter, after recording essentially no change up or down between Q2 and Q3 2000. The decrease in profits from U.S. operations reflected a smaller increase in the average prices that companies received for their products at the same time that both labor and non-labor costs were increasing sharply.

In contrast, the rest-of-the-world component of prices increased by more than $17 billion in the fourth quarter of last year, after an increase of only about half this magnitude during the third quarter.

Despite the final-quarter downturn, corporate profits for full-year 2000 actually grew at a very healthy rate. Last year's 10.5% profit increase from current production was more than twice as large as the 5.0% gain recorded the year before. Although it's still early in the year, there would seem to be little doubt that corporate profit growth will be slight to nonexistent during 2001.