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Economy in Brief

US 4Q GDP Little Revised at 1.7%, Profits Surged
by Tom Moeller March 30, 2006

US real growth last quarter was revised up slightly, as expected, to 1.7% (AR) from the preliminary estimate of 1.6% and from 1.1% growth estimated two months ago. This quarter, growth is widely expected to bounce back with several forecasts calling for a 5% advance.

Reported today for the first time, the estimate of 4Q corporate profitability surged. A 14.4% (21.3% y/y) jump was the strongest for any quarter since 4Q 1992 and was driven by a 37.6% (12.3% y/y) surge in financial sector earnings. They recovered after the losses suffered due to payments in the wake of three hurricanes during 3Q. Domestic nonfinancial profits snapped back 12.1% (26.8% y/y) from the 1.1% loss during 3Q while profit margins surged. Foreign sector profitability fell 6.5% (+16.8% y/y).

After tax profits (w/CCA and IVA) increased 13.8% (14.6% y/y) as taxes rose 15.8% (42.4% y/y). After tax profits without adjustment grew 11.7% (38.7% y/y) while the inventory valuation and capital consumption adjustments roughly offset one another. Corporate net cash flow grew a strong 4.1% (18.5% y/y).

Domestic demand was reduced during 4Q as personal consumption of motor vehicles & parts slumped 2.9% (-10.6% y/y). Lower auto consumption reduced real GDP growth by 1.9 percentage points but the GDP subtraction from lower auto output was limited to 0.6 percentage points as inventories built up. Overall, real PCE grew just 0.9% at an annual rate (2.9% y/y) during 4Q05, the slowest quarterly rate of growth in over ten years.

Defense spending is now estimated to have fallen 2.3% (+1.7% y/y) and that decline subtracted 0.4% percentage points from 4Q GDP growth.

The drag on GDP growth from a wider foreign trade deficit ballooned to 1.4 percentage points as imports grew 12.1% (AR, 5.3% y/y) while exports rose 5.0% (6.4% y/y).

Countering the drag from foreign trade, inventories contributed 1.9 percentage points to GDP growth after more than a year of little or no positive contribution.

The chain price index grew 3.5%, an upward revision from the early estimate of a 3.0% rise. The upside surprise during 4Q was that the price index for private fixed investment grew 5.4% (AR, 3.7% y/y), inflated by an 8.3% (5.2% y/y) jump in residential and a 3.8% (2.8% y/y) rise in nonresidential fixed investment.

Chained 2000$, % AR 4Q '05 (Final) 3Q '05 Y/Y 2005 2004 2003
GDP 1.7% 4.1% 3.2% 3.5% 4.2% 2.7%
  Inventory Effect 1.9% -0.4% -0.1% -0.3% 0.3% 0.0%
Final Sales -0.2% 4.6% 3.3% 3.8% 3.9% 2.7%
  Foreign Trade Effect -1.4% -0.1% 0.0% -0.1% -0.5% -0.3%
Domestic Final Demand 1.1% 4.5% 3.3% 3.9% 4.4% 3.0%
Chained GDP Price Index 3.5% 3.3% 3.1% 2.8% 2.6% 2.0%
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