GNP Growth Put at 2.7%; Corporate Profit Off 7.2%

From Reuters

The economy grew at a revised 2.7% annual rate in the third quarter, the Commerce Department said Wednesday, but the slightly higher-than-expected estimate did little to dispel fears of an impending fourth-quarter slump.

“It looks right now like the economy has stalled,” said economist Donald Ratajczak at Georgia State University. “All of the third-quarter growth occurred in July, and since then the economy has been flat.”

The revision in third-quarter gross national product from a previously reported 2.5% rate resulted from a downward adjustment in the U.S. trade deficit, which helped boost overall growth in the economy.


But in a disturbing sign for business, the department also said third-quarter after-tax corporate profits fell by 7.2%, the same rate as the second quarter and the third consecutive quarterly decline.

The drop in profits was the steepest since a 16.5% decline in the first quarter of 1986.

Shrinking profits cause businesses to lay off workers, reduce investment and slow production, ultimately cutting economic growth. Such a pattern has already emerged in the manufacturing sector, where employment has fallen for seven months.

“The Federal Reserve may find disturbing a corporate profit drop of 7.2%,” said Thom Brown, managing director at Rutherford Brown & Catherwood.

“I think the Fed has to do something about bringing down interest rates in the next week or two,” he added, because easier credit stimulates borrowing and fuels growth.

The economy will now have to grow by 1.8% in the fourth quarter to achieve the Bush Administration’s projection of 2.7% growth over the fourth quarter a year ago. But analysts said such a goal appears difficult.

Economist Allen Sinai of Boston Co. this week predicted that the economy will be flat or contract by as much as 0.6% in the fourth quarter, potentially ending the seven-year peacetime record of uninterrupted growth.