Corporate profits (CP) increased by 0.5% quarter on quarter (q/q), in the fourth quarter of 2016. This after rising 5.8% over the previous three months. On year on year basis, CP advanced by a solid 9.3%. In dollar terms CP were 2,150 billion on a seasonally adjusted annual rate (SAAR).

CP would have been stronger (+1.4%), in the fourth quarter if a $20 billion corporate settlement between Volkswagen and federal and state governments was included.  corporate-profitFigure 1 shows quarterly CP SAAR from 2000 to present in billions on the right hand scale and the percentage change (red line) on the left hand scale. The current trend is lackluster raising the question of “where to from here?”

The Federal Reserve’s Senior Loan Officer Opinion Survey shows favorable lending standards with no sign of weakness in demand on the forefront. The U3 unemployment rate at 4.7% is low and fewer people are collecting unemployment benefits. The Conference Board report on consumer confidence is at a seventeen year high. Business confidence is also robust both nationally and globally. People feel wealthier because their home values have increased and their equity portfolios have advanced. The S&P 500 was up 309 points to 2,369 mid-day March 31st, a 15.0% rise from March 31st 2015.

However, uncertainties remain, muddying the waters somewhat, including: The FED monetary policy. The FED has yet to unwind its massive balance sheet that was accumulated after the great recession. Short term interest rate trajectory and speed of adjustment. The strong US dollar and its impact on trade. The newly elected President and his administration’s policy actions.  Still on balance most of the econometric data is favorable for expansion to continue.

At Gerdau we keep a keen eye on corporate earnings as it is an excellent indicator of the health of the US economy. A solid and growing economy translated to stronger steel sales.