Inverse Relationship: Economy and Profits

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Earlier this month, Chairman of the Federal Reserve, Ben Bernanke, announced that the economy of the United States is showing a slower than expected economic growth so far this year.

Against this backdrop, many U.S. companies are expecting to report surprisingly robust profits when second-quarter earnings are announced later this month. Combined earnings of companies in the Standard & Poor’s 500-stock index are projected to rise 13.6% from a year ago for the second quarter, according to an analysis of Wall Street forecasts by Brown Brothers Harriman.

“Corporate profits have been much stronger than the economy in general,” says Charles H. Blood Jr., a market strategist at the New York-based financial services firm.

Many companies, particularly those in the technology and manufacturing sectors, are benefiting from demand from emerging markets, where they are deriving an increasing share of their sales. Cost cutting during the recession helped improve productivity and profitability.

Three years into states’ most severe fiscal crisis since the Great Depression, their finances are showing the clearest signs of recovery to date.? States in recent months have seen stronger-than-expected revenue growth.

Slow growth rate

The economy grew by 1.8% in the first quarter of 2011, compared to a 3.1% growth the previous quarter, the United States Department of Commerce reported.

The International Monetary Fund estimates that the U.S. economy’s growth rate?projected at roughly 2.5% in 2011 and 2012?will be less than a third of the 9.5% growth rate projected for China during that stretch.

Federal Reserve officials see the U.S. economy settling into a disappointingly weak recovery this year and next, and say they have done all they are prepared to do to spur growth for now.

In his speech, Mr. Bernanke stated that aggregate output, which is the sum of all the national income, increased at an annual rate of only 1.8% in the first quarter.

Another important factor in determining the speed of economic growth is the ability and readiness of households to spend.

According to Bernanke, even though household incomes have increased due to a better job market, consumers have been cautious in spending due to the increase in food and energy prices, declining home values, restrictive credit markets, and a still-high level of unemployment.

The United States economy grew for the 7th straight quarter, although the rate of growth was disappointing.

The slowdown in the growth of real GDP in the first quarter of 2011 showed that the economy is not gaining momentum, dampening prospects for a meaningful reduction in unemployment in the near future.

Sources: Wall Street Journal, econpost, cbpp

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