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Economy in Brief

U.S. Corporate Profits Head Lower Fast…
by Robert Brusca March 29, 2007

Corporate profits with capital consumption adjustment fell by 0.3% in Q4 2006. Profits had risen by 3.9% in Q3 2006. The drop off comes as corporate executives have been warning of a pending earnings slowdown.

Corporate profits are of course important for stock market investors. They also are important in determining the trend for capital spending. When profits slide corporations generally reduce capital spending. As the chart above shows, the current slowdown in capital spending is coming ahead of profits weakness. This is a worrying result since a number of earnings estimates just released point to a slowdown in the period ahead and capital spending is lower before that effect has hit the corporate balance sheet.

Corporate Profits Accounting
  Q4-06 Q3-06 Q2-06 Q1-06 Q4-05
Profits Pre Tax w/IVA & CCA 18.3% 30.6% 18.5% 18.9% 12.8%
  Less Corp Tax 12.2% 29.5% 21.2% 14.0% 33.5%
Equals Profits after tax w/…… 21.0% 31.0% 17.4% 21.0% 5.7%
Net Dividends 11.7% 11.4% 11.1% 11.1% -7.6%
Undistributed Profits w/…… 36.2% 68.8% 26.9% 36.1% 38.2%
Cash Flow
Net Cash Flow w/…… 12.7% 12.2% 11.6% 14.2% 14.7%
  Undistributed profits w/…… 36.2% 68.8% 26.9% 36.1% 38.2%
  Consumption of fixed capital 2.6% -6.4% 4.6% 4.5% 6.9%
Less IVA 10.6% 12.5% 14.5% 12.4% 13.8%
Equals Net Cash Flow 10.6% 12.5% 14.5% 12.4% 13.8%
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