Q2 Corporate Profits: Still Strong

September 1, 2006 – In the data released this week, U.S. corporate profits from current production rose by a sturdy 3.2% in Q2 (not an annual rate) after an even stronger 12.6% gain in Q1 (Charts 1 and 2). Compared to the same quarter last year, these profits rose by 20.5% in Q2.

Chart 1. Corporate profits from current production. Percent change. First quarter 2000 through second quarter 2006.

Chart 2. Corporate profits from current production. Billions of dollars. First quarter 2000 through second quarter 2006.

Among the major industry groups, domestic financial firms’ profits rose by 7.8% in Q2, and net foreign profits rose by 4% (Chart 3). Domestic non-financial profits lagged well behind the others, with Q2 growth slowing to just 0.6% (a 2.5% annual rate).

Chart 3. Corporate profits from current production by major industry group. Percent change. First and second quarter, 2006.

Domestic non-financial firms were apparently harder hit by the slowing in domestic demand growth. Real final sales to domestic purchasers rose at an unusually weak 1.7% annual rate in Q2, after an extra-strong 5.4% gain in Q1.

Compared to the same quarter last year, domestic non-financial firms’ profits rose by 15.6% in Q2 and their real profits rose by 11.9% (Chart 4). That’s less real growth than the 21.5% gain for the four quarters through Q1, but still exceptionally strong. For context, these real profit gains averaged 3.5% over the last ten years.

Chart 4. Real profits from current production, domestic non-financial corporations. Year-ago percent change. First quarter 1949 through second quarter 2006.

Bottom line: Profit growth slowed in Q2, but the four-quarter trend remained strong.

Suzanne Rizzo

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