By Ben Leubsdorf and Josh Mitchell 
 

WASHINGTON--A key measure of corporate profits rose this spring for a second straight quarter alongside modest growth in the overall economy, though U.S. businesses remain under pressure from global weakness and other forces.

Corporate profits after tax, without inventory valuation and capital consumption adjustments, rose 4.9% from the prior quarter to a seasonally adjusted annual level of $1.627 trillion in the second quarter, the Commerce Department said Friday. Profits had jumped 8.9% in the first three months of 2016, after dropping in three of the previous four quarters.

The broad trend remains weak. In the second quarter, profits were down 2.2% compared with a year earlier. And an alternative measure, pretax profits with inventory valuation and capital consumption adjustments, declined 1.2% in the second quarter from the prior three months.

Overall economic growth remained subdued in the spring. Gross domestic product, a broad measure of goods and services produced across the economy, expanded at an inflation-adjusted 1.1% seasonally adjusted annual rate in the second quarter, according to Friday's report. That down slightly from last month's initial estimate of a 1.2% growth pace.

Economists surveyed by The Wall Street Journal expected revised GDP growth at a 1.1% pace for the April to June period. Output had expanded at a 0.8% pace in the first quarter following the fourth quarter's growth rate of 0.9%.

Growth in consumer spending this spring was revised up slightly, offset by larger declines than had been previously estimated for residential construction and spending by state and local governments.

After a weak first half of 2016, overall growth was poised to accelerate over the summer. Forecasting firm Macroeconomic Advisers on Thursday estimated GDP would grow at a 3.1% annual pace in the third quarter.

Despite modest output growth, the U.S. economy had continued to add jobs at a solid pace. Through July, nonfarm payrolls rose this year by an average of 186,000 per month, somewhat slower than last year's average pace of 229,000, according to the Labor Department. The unemployment rate was 4.9% in July and has hovered at or below 5% for most of the past year.

With work hours increasing faster than output, U.S. productivity has fallen in each of the past three quarters, the longest stretch of declining productivity since 1979, according to Labor Department data. That's a worrisome trend that could restrain wage gains and overall economic growth in the coming years.

The productivity slowdown of the past decade, if it continues, "would have wide-ranging consequences for employment, wage growth and economic policy more broadly," Federal Reserve Vice Chairman Stanley Fischer said last weekend. "For example, the frustratingly slow pace of real wage gains seen during the recent expansion likely partly reflects the slow growth in productivity."

Weak business investment could be one factor behind sluggish productivity as firms pull back on purchases of new equipment and other products that could help boost their workers' efficiency. In the second quarter, fixed nonresidential investment fell at a 0.9% annual rate, its third consecutive quarterly decline.

The Commerce Department had initially estimated a steeper drop in business investment last quarter; the latest report revised up estimated spending on research and development and other intellectual property products.

There are some tentative signs of stabilization for business investment in new equipment. New orders for nondefense capital goods excluding aircraft rose in June and July, according to the Commerce Department, though 2016 orders to date remain down compared with last year.

"Although I expect business fixed investment to begin to grow again in the second half, it will likely remain soft as profits have stagnated and election year uncertainty could act as an additional depressant," Federal Reserve Bank of New York President William Dudley said in a July 31 speech.

Residential investment, private inventories and government expenditures also dragged down overall U.S. growth in the second quarter.

Consumer spending remained the economy's driving force, with household outlays rising at a 4.4% pace last quarter--up from an earlier estimate of growth at a 4.2% annual rate. That was the largest increase in household outlays since late 2014.

Profits at U.S. corporations have been stressed in recent years by the strong dollar, which makes U.S.-made products more expensive for foreign customers, and low oil prices that have hammered the domestic energy industry.

The dollar and oil prices have stabilized in recent months but margins could be squeezed going forward by weak global growth, rising labor costs and other forces.

The Commerce Department in July released revised corporate-profits figures for the past few years, incorporating new data from tax records and other sources. The revised figures show after-tax unadjusted profits rose 2.5% in 2014 before falling 8.5% in 2015.

The Commerce Department's latest report on U.S. gross domestic product can be accessed at: http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Josh Mitchell at joshua.mitchell@wsj.com

(END) Dow Jones Newswires

August 26, 2016 08:45 ET (12:45 GMT)

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