This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

We Knew First-Quarter GDP Report Would Be Ugly, but It Was Hideous

NEW YORK (TheStreet) -- We knew the government's last number on first-quarter economic growth would be ugly -- and it surely was. But buried in the details of short-term miasma is some sure-to-be-overlooked information that points to a brighter tomorrow.

The economy shrank at a 2.9% annual rate between January and March, mostly because of the now-infamous polar vortex that took over most of the eastern U.S. beginning, oh, about last August (not that I'm bitter). Consumer spending was much worse than previously reported, rising at a 1.0% clip instead of the 3.1% the Commerce Department said last month. Gross private investment fell at the same 11.7% annual clip reported in May, and government spending dipped at a 0.8% rate.

The more interesting part was the distribution in the decline in corporate profits. While relatively little coverage will focus on this part of the report, it's the part that may matter most when all is said and done.

The government said profits of financial corporations decreased $52.6 billion in the first quarter, in contrast to an increase of $6.1 billion in the fourth quarter. Profits of nonfinancial corporations increased $75.4 billion, compared with an increase of $19.5 billion. This increase primarily reflected increases in utilities industries, durable-goods manufacturing industries, and information industries, partly offset by lower profits in some non-durable goods manufacturing.

The government also noted that unit profits fell because of rising unit labor costs. Now, this might get the inflation hawks yelling that the Federal Reserve should hike interest rates sooner than we expect. They're wrong, and here's why.

First, if profits are really moving into the productive sectors of the economy from the financial sector, this is a good thing. There's little doubt the rewards of the capitalist game became overconcentrated in finance over the 25 years before 2008, with disastrous results. After all, Google (GOOG) and Apple (AAPL) each created more jobs in the last decade than the entire U.S. securities industry. (I compared their filings, which report the number of workers, to Labor Department data on securities employment). And you can say that those two are outliers. But it's also true that the sum of Expedia (EXPE) and (CRM), much more prosaic names, also created more jobs than all the king's buyout groups and all the king's hedge funds.

If the model where Wall Street gets the lion's share of the economy's rewards is really on its way down or out, that is a good thing. Other industries will do more with it. That it may be happening with little to no nudge from policymakers is even better.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.99 0.00%
FB $102.01 0.00%
GOOG $682.40 0.00%
TSLA $151.04 0.00%
YHOO $27.04 0.00%


Chart of I:DJI
DOW 15,973.84 +313.66 2.00%
S&P 500 1,864.78 +35.70 1.95%
NASDAQ 4,337.5120 +70.6750 1.66%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs