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August 25, 2000

Profit Growth Cooled in Second Quarter As Overall Economic Strength Increased

Corporate Profits Sinking with Lower Demand ... Weiss comments

WASHINGTON - Corporate profit growth slowed in the second quarter even as the economy's overall pace sped up.

Gross domestic product, the nation's total output of goods and services, advanced at a seasonally adjusted 5.3% annual rate, the Commerce Department said Friday. The gain, first reported as a 5.2% increase, followed an already strong 4.8% gain in the first quarter.

Economists surveyed by Thomson Global Markets had expected to see a 5.4% rise in second-quarter GDP, the government's broadest measure of economic health.

Corporate profit growth slowed in the second quarter, rising 3% compared with a 4.8% increase in the first quarter. The drop may be partially attributed to changes in way the government calculates profits. The figures exclude such nonrecurring items as special charges and capital gains and losses, and is based on depreciation of fixed assets and inventory withdrawals valued at current costs, rather than at historical cost.

After-tax profits of U.S. corporations grew by 2.4% in the second quarter, down from 5.7% in the first quarter.

The GDP figures were the government's first revision for the quarter, a final report is scheduled for release Sept. 28.

Inflation was minimal and in line with the first quarter. The Commerce Department's price deflator rose 2.6% in the second quarter, following a 2.5% rise in the first three months of the year.

Consumer spending, which accounts for two-thirds of all economic activity, cooled, rising at a 2.9% rate, the slowest pace since the second quarter of 1997. In the first quarter, consumer spending surged at a 7.6% rate, a 17-year high.

Business investment -- including spending on computers and other equipment -- surged 14.6% in the second quarter, slower than the 21% increase logged in the first quarter but still strong. Businesses increased their spending on inventories, adding to second-quarter growth.

Increased spending by the federal government also contributed to economic strength, rising at a whopping annual rate of 16.9% in the second quarter. That compared with a 14.2% rate of decrease in the first quarter.

The U.S. trade deficit, however, continued to be a drag on growth. The trade gap subtracted 1.2 percentage points from growth in the second quarter, compared to a reduction of 0.9 percentage points in the first quarter.

Friday's report shows the economy growing at an annual rate of $119.7 billion in the second quarter, pushing the country's total output of goods and services to $9.3 trillion, after adjusting for inflation.

This report reaffirms the comments we made yesterday. It's clear that corporate profits are being squeezed by a slowdown in demand. Earnings rose at a considerably slower pace than in the first quarter of 2000. Profits were clearly affected by consumer spending, which dropped off in the second quarter. At the same time, though, inflation rose higher than in the first quarter. So, while most other areas of growth diminish, inflationary pressures continue to creep into the economic picture. Look for this vicious spiral of decreasing earnings and increasing inflation to continue.
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