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Slower Profit Growth Hints Fewer Job Gains Ahead

 June 01, 2012 01:21 PM


(By Mani) Corporate profit growth has slowed to 6.5 percent compared to a year ago, suggesting slow business investment and job gains going forward.

Profits from current production increased $11.4 billion in the first quarter after a gain of $16.8 billion in the fourth quarter and $32.5 billion in the third quarter, according to the recent data from the Bureau of Economic Analysis.

The large increase in first-quarter taxes on corporate income and the large decrease in the capital consumption adjustment resulted in lower profits.

The capital consumption adjustment fell $230.4 billion in the first quarter, compared with a decrease of $1.8 billion in the fourth. The inventory valuation adjustment declined $9.4 billion, in contrast to an increase of $26.9 billion in the preceding quarter.

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Domestic industry profits slowed for both financial and nonfinancial sectors. Domestic profits of financial corporations rose $20.6 billion in the first quarter, compared with an increase of $29.9 billion in the fourth quarter. Domestic profits of nonfinancial corporations advanced $6.3 billion, compared with an increase of $28.4 billion.

In the first quarter, real gross value added of nonfinancial corporations increased, while profits per unit of real value added decreased. The decrease in unit profits reflected a decrease in unit prices and a decrease in unit labor costs corporations incurred was offset by an increase in unit non labor costs.

Profits provide the incentive to produce and are a signal that business operations are being successful. The slowdown in profits provides less incentive for businesses to expand production and thereby add new equipment and workers.

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The recent dismal jobs data confirmed the grim situation. The nation added a net of just 69,000 new jobs in May, far lower than the 150,000 expected by most economists, according to data released by the Labor Department.

In addition, the already weak job creation numbers posted for April were revised down sharply to show a gain of just 77,000 jobs, 38,000 fewer than the 115,000 initially reported.

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