US real GDP fell at an annual rate of 1 percent in Q1 2014, according to the second estimate from the BEA. Corporate profits plunged, but remained high by historical levels

1. Economics for your Classroom from
Ed Dolan’s Econ Blog
US Corporate Profits Take Big
Hit as Q1 GDP Falls a Full
Percentage Point
Posted May 29, 2014
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2. May 29, 2014 Ed Dolan’s Econ Blog
US GDP Falls in Q1 2014
 The second estimate from the
Bureau of Economic Analysis
released on May 29 showed that
US real GDP fell at an annual rate
of 1.0 percent in Q1 2014
 The advance estimate released in
April had shown positive growth of
0.1 percent
 Harsh winter weather undoubtedly
contributed to the downturn

3. Phases of the Business Cycle
 According to standard business cycle
terminology, the recession phase of the
business cycle is the downward
movement of GDP from its previous
peak
 The recovery phase is the upward
movement from the trough (low point)
of the recession and continues until
GDP again reaches its previous peak.
 Once GDP moves above its previous
peak, the expansion phase begins.
 The latest data show that the expansion
has stalled, although growth is expected
to resume in the second quarter
May 29, 2014 Ed Dolan’s Econ Blog

4. Sources of Growth by Sector
 Most of the fall in GDP was due to a
decrease in investment, especially a sharp
decrease in inventories
 The contribution from consumption was
positive but lower than the 2.22 percentage
points in Q3
 A decrease in expenditures of state and
local government was only partly offset by
an increase in Federal expenditures
 Exports, which had been a strong point of
the recovery, also turned negative
Contribution by sector to the
-1% GDP growth in Q1 2014
Note: Imports are recorded in the national
accounts with a negative sign, so the -.12
percentage points shown here represent an
increase in imports
May 29, 2014 Ed Dolan’s Econ Blog

5. Export Growth Plunges
 Exports have played a leading role in
GDP growth during much of the
recovery
 Beginning in Q2 2012, the growth of
exports slowed, but then recovered
again in the last three quarters of 2013
 In Q1 2014, exports took a dive, turning
in by far their worst performance since
the depths of the recession
May 29, 2014 Ed Dolan’s Econ Blog

6. State and Local Spending Turns Negative Again
 Decreasing government spending,
has been a negative influence on
GDP growth for most of the past 3
years
 In mid-2013, state and local
government spending showed the
first convincing growth for four years,
more than offsetting the continued
decrease in federal spending
 In Q1 2014, the situation reversed,
with S&L spending making a negative
contribution that more than offset a
tiny increase in federal government
spending
May 29, 2014 Ed Dolan’s Econ Blog

7. Corporate Profits Take a Dive
 For most of the past two years,
corporate profits have been running
at or near record-high levels
 Profits before tax fell 10 percent in Q1
2014 and profits after tax plunged by
14 percent
 Despite the sharp drop, corporate
profits after tax remained above the
peak reached during the boom that
preceded the Great Recession
May 29, 2014 Ed Dolan’s Econ Blog

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