GDP Thoughts

Looking at the US GDP release for some clues as to the corporate condition, I do not see much to be overly optimistic about.

1.    Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $47.5 billion in the second quarter, compared with an increase of $148.4 billion in the first quarter.  Current-production cash flow (net cash flow with inventory valuation  adjustment) -- the internal funds available to corporations for investment -- increased $61.1 billion in the second quarter, compared with an increase of $33.3 billion in the first.  The cash flow number looks pretty good.

2.Domestic profits of financial corporations decreased $3.4 billion in the second quarter, in contrast to an increase of $5.2 billion in the first.  Domestic profits of nonfinancial corporations increased $48.2 billion in the second quarter, compared with an increase of $117.2 billion in the first. 

3.    Profits before tax increased $15.3 billion in the second quarter, compared with an increase of $224.5 billion in the first.  The before-tax measure of profits does not reflect, as does profits from current production, the capital consumption and inventory valuation adjustments.  These adjustments convert depreciation of fixed assets and inventory withdrawals reported on a tax-return, historical-cost basis to the current-cost measures used in the national income and product accounts.  The capital consumption adjustment decreased $0.8 billion in the second quarter (from -$169.9 billion to -$170.7 billion), compared with a decrease of $106.9 billion in the first.  The inventory valuation adjustment increased $32.9 billion (from -$36.4 billion to -$3.5 billion), compared with an increase of $30.8 billion.

While Positive, we can see that corporate profit growth is slowing (as of Q2) and I would not be surprised to see it slow further in Q3.

Stocks are rallying on the news.  What exactly is there to cheer about?  The overall GDP number - +1.7% - was above expectations (+1.6%), but by no means strong. Prices are under control (+0.1%) and possibly heading lower (this, however, would not be good) and personal consumption was better (+2.2% vs +1.9% in Q1).  

Treasuries are rallying on the news (this I get), shaving a couple of bps off their yield.  10s are now 2.48%, 5s at 1.26%.

Yee haa, always moving.  Good hunting.