Corporate profits in 4th Quarter 2005 highest in 4 decades

Corporate Pretax Profits Jump 14.4%

Strongest Gain Since 1992
Shows Effects of Katrina
Weren't as Bad as Feared
By MARK WHITEHOUSE
March 31, 2006; Page A2

Corporate America's share of the nation's income rebounded from the havoc of Hurricane Katrina to a level not seen in four decades, and the hurricane did a bit less damage to the U.S. economy than previously thought.

The Commerce Department said yesterday that corporate pretax profits in the fourth quarter of 2005 grew 14.4% from the previous quarter, the strongest rate since 1992. Pretax profits in the third quarter fell 4% as hurricane-related insurance payouts slammed financial results.

Corporate profits accounted for 11.6% of gross domestic product in the fourth quarter -- the biggest share of the nation's income companies have taken since 1966. They have been able to do so, say economists, by sharing less with their workers.


"It highlights the increased power of corporate America versus labor," says Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. "That is a reflection of the global competition that labor now faces in America."

Economists say profit growth is likely to ebb this year as U.S. unemployment falls and workers regain some bargaining power. In the meantime, companies might reinvest some of their gains, giving the economy added momentum.

"Corporations are sitting on a mountain of cash, so as long as the economy is growing they will start spending some of that cash," says Nariman Behravesh, chief economist at Global Insight, an economic consultancy in Waltham, Mass.

The Commerce Department also reported that real gross domestic product -- the value of the nation's output of goods and services, adjusted for inflation -- grew at a seasonally adjusted, annualized rate of 1.7% in the fourth quarter. The figure was revised up from an earlier estimate of 1.6% but remains the lowest rate recorded since early 2003. For the full year, GDP grew 3.5%.

The small, upward revision in fourth-quarter GDP reflects the fact that companies restocked inventories faster than expected in Katrina's wake. Now, many forecasters believe the economy is experiencing a posthurricane boost as strong demand for consumer and business products has elevated business activity, prompting companies to step up hiring.

"The first quarter is going to be very firm," says Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, who estimates that GDP in the first quarter, which ends today, grew at a 4.5% annual rate.

The consensus estimate of economists polled by WSJ.com is that GDP grew at an annual rate of 4.6% in the first quarter, but the growth rate will slow to 3.3% in the second quarter and could be around 2.9% by the end of the year.

The factors that crimped growth in the fourth quarter were largely temporary. Katrina and an unusually cold December took a toll on hiring and consumer spending. Defense spending dropped because of the late signing of an appropriations bill, and special short-term auto discounts prompted people to buy cars earlier in the year.

Now, the picture for jobs and spending looks a lot better. The Labor Department yesterday reported a drop in the number of people filing for unemployment benefits to 302,000 in the week ended March 25, down 10,000 from the previous week. Companies added an estimated 243,000 jobs in February, bringing the 12-month total to 2.1 million. And despite slow auto sales, total retail sales in February were up 6.7% from February 2005.

Write to Mark Whitehouse at mark.whitehouse@wsj.com