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Trading  | May 26, 2017

After a very disappointing first Q1 GDP print of only 0.7%, on Friday the BEA reported that its second estimate of first quarter growth showed a sizable rebound, with annualized GDP growing at 1.2%, above the 0.9% estimate. The growth rate, however, was still well below the 2.1% print from Q4 2016.

The increase in real GDP was accounted for by increases in business investment, housing investment, consumer spending on services, and exports. These increases were partly offset by decreases in inventory investment, and government spending. Imports, which are a subtraction from GDP, increased. The upward revision to the second estimate of GDP growth reflected upward revisions in business investment, consumer spending in services, and state and local government spending. These upward revisions were partly offset by a downward revision to inventory investment.

Of note, personal consumption contributed 0.44% to the bottom GDP line, up nearly double from the 0.23% reported one month ago. In a longer-term context, however, it was still a disappointing number.

Similarly, fixed investment rose to 1.85% in the second revision, up from 1.62% reported in the first revision.

Yet while the headline data showed a modest improvement, one which will likely subtract from “pent up” Q2 GDP growth, a more troubling observation was revealed in the corporate profits estimation, which decreased 1.9% at a quarterly rate in the first quarter of 2017 after increasing 0.5 percent in the fourth quarter of 2016.

  • Profits of domestic nonfinancial corporations decreased 1.4 percent after decreasing 4.9 percent.
  • Profits of domestic financial corporations decreased 5.5 percent after increasing 5.4 percent.
  • Profits from the rest of the world increased 1.4 percent after increasing 11.0 percent.
  • Y/y corp. profits grew 3.7% in 1Q after rising 9.3% prior quarter
    • Financial industry profits declined 5.5% in 1Q after rising 5.4% prior quarter
    • Federal Reserve bank profits up 2.7% in 1Q after falling 1.8% prior quarter
    • Nonfinancial sector profits fell 1.6% in 1Q after falling 4.9% prior quarter

A big part of the reason why this number differs so notably from the alleged surge in profitability, is that it avoid non-GAAP adjustments and various other gimmicks used by management teams to boost their stock prices and increase stock-linked compensation.

As the WSJ notes, a main driver behind the drop was that legal settlements trimmed top-line numbers. Profits after tax without inventory valuation and capital consumption adjustment, a number that reflects figures reported by companies, was down 0.3% from the fourth quarter of 2016, Commerce Dept says. Financial corporate profits were hit after the federal government imposed a $3.1B penalty on a unit of Deutsche Bank and a $2.48B penalty on a unit of Credit Suisse, and nonfinancial profits were reduced by $4.3B following a settlement with Volkswagen.

Of course, for stock market purposes, these settlements are “adjusted” out. However, when it comes to real data, what matters is the actual, GAAP bottom line, and here we just suffered the biggest drop in over a year.

And now we await for the sellside to start cutting their Q2 GDP estimates as a result of this “pulling forward” of growth back to Q1.


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