U.S. Corporate Profits Too Weak To Give Big Stimulus

By Agence France-Presse The government's May 24 report on U.S. corporate profits showed the first increase in a year and a half, but growth remains too weak to spark a rebound in business investment, analysts said. After-tax corporate profits rose 0.9% in the first quarter, the Commerce Department announced. This is the first increase since the third quarter of 2000. Profit growth will be vital to fund future capital spending and a pickup will be crucial as the year progresses, analysts say. Federal Reserve Chairman Alan Greenspan has pointed to a pickup in business investment as the key ingredient to a sustained economic expansion. The increase was smaller than some had hoped, however. "Corporate profits were disappointing," says Eric Green, economist at BNP Paribas. "To start to grow in non-residential fixed investment, you're going to have to get double-digit growth" in corporate profits. "The good news is that ... corporate America is returning to profit growth. The bad news is that there is little indication that business investment is growing enough to cause the kind of economic rebound expected by the stock market based upon current valuation levels," says Edgar Peters, chief investment officer at Pan Agora Asset Management. Economists said profits should start picking up more strongly through the rest of the year, as productivity growth and continued increases in sales should widen margins. "It shouldn't be too difficult to get 15% growth" in profits in the second half of the year, given the low base of comparison from last year, says Stephen Gallagher, chief economist at Societe Generale. Business investment dropped 8.2% in the first quarter, after contracting throughout last year. The Commerce Department report was part of a release showing a revised pace of economic growth of 5.6% in the first quarter, down from 5.8% growth in the previous estimate. All in all, the report "takes a little shine off the recovery profile, [but] it does not derail the story," Ian Morris, economist at HSBC Securities, said in a research note. Copyright Agence France-Presse, 2002

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