The second revision to Q1/23 GDP growth came in slightly stronger than expected: 1.3% vs 1.1%. Both those numbers are annualized, so actual growth in the quarter was a mere 0.32%. Inflation, according to the GDP deflator (the broadest and most inclusive measure of inflation) was also a bit higher than expected: 4.2% vs 4.0% (annualized). Since last summer, inflation economy-wide has fallen by more than half from a high of 9.0%.
Also released today were estimates of corporate profits for the first quarter, and these were somewhat disappointing, having fallen from a high of 10% of GDP last summer to now 8.7% of GDP. In nominal terms, profits fell 8% from last summer's level to $2.31 trillion. Despite the recent weakness, however, corporate profits as a percentage of GDP are nevertheless rather strong considering they have averaged only 7% of GDP in the post-war period.
Chart #1 compares the level of real GDP to historical trends. The green line represents the trend growth rate the economy averaged from 1965 through 2007 (3.1% per year). The red line is the trend that has held since the current recovery started in mid-2009 (2.1% per year). A one percentage point difference per year doesn't sound like much, but over time it really adds up. If the economy had remained on a 3.1% annual growth path, it would be 25% larger today.
Chart #2 compares the year over year growth of real GDP (blue) to the year over year growth in private sector jobs. Not surprisingly, these two series tend to track each other, since it usually takes more workers to generate more growth. Over long periods, GDP growth tends to be greater than jobs growth because worker productivity tends to average about 1½% per year (i.e., the average worker generates about 1½% more output per year thanks to productivity-enhancing technology and machinery) . What's interesting here is that jobs growth has been stronger than GDP growth in the past year or so. Although the pace of jobs growth has slipped to 2.1% in the most recent six-month period, that could theoretically support real GDP growth of at least 3%. Considering the myriad problems facing the economy these days, it's not unreasonable to expect real GDP growth to remain around 2% per year for at least the next six months—a result not at all out of line with historical experience.
Chart #3 shows the quarterly annualized rate of inflation according to the GDP deflator. Although painful, the recent spike in inflation has been much less, and of much shorter duration, than what we experienced in the 1970s.
Chart #4 shows corporate profits as a percentage of nominal GDP. What stands out to me is that corporate profits during the current business cycle expansion (2009 - today) have been substantially stronger than they were in prior decades, despite the fact that the economy averaged 3.1% annual growth in the pre-2009 period.
My best guess as to why corporate profits have been so strong? I think it's explained to a great degree by globalization. US corporations today can market their products and services to a vastly larger market today than they could a few decades ago, which means that successful businesses can greatly leverage their market reach. World trade volume (Chart #5) has expanded by more than one-third since 2007. And that's just trade in goods; including services (e.g., technology, data, entertainment) the growth would surely be an order of magnitude larger. (sources for this dataset are welcome)