On the face of it, the economic update that the government is releasing on Friday should be a big yawn. Economists expect the revised numbers to confirm what we know already — that gross domestic product grew at an annual rate of just 1 percent in the final three months of 2015.
But it would be a mistake to dismiss the release — even if you’re off from work for the Easter holiday. That’s because the government also will be publishing its first estimate of what happened to company profits in the period. And the news isn’t expected to be pretty.
Pre-tax earnings probably fell 9.5 percent in the fourth quarter from a year earlier, after dropping 5.1 percent in the third, according to economists at JPMorgan Chase & Co. in New York. That would be the biggest decline since the 31 percent free fall in the closing months of 2008 during the height of the financial crisis.
Profits last quarter probably were unusually depressed by a $20.8 billion penalty payment by BP Plc to settle claims over the 2010 oil spill in the Gulf of Mexico. But even after stripping out that one-time charge, earnings likely still fell about 5 percent, by JPMorgan’s reckoning.
Why is that important? Well, history shows that when profits fall, the economy often follows them downwards. An earnings hit of the size that JPMorgan says is taking place has led to a recession within three years about 90 percent of the time.
Now the bank doesn’t think the odds of a downturn are anywhere near that high. After all, a big reason why profits are dropping is because energy companies have been hurt by plunging oil prices, which on net should be good for the economy.