Profits at U.S. companies during the third quarter posted their largest annual decline since the recession, underscoring the competitive pressure from a strong dollar and weak global demand that could limit businesses’ ability to support stronger economic growth in the coming months.
A comprehensive measure of companies’ profits across the U.S.—earnings adjusted for inventory and depreciation—dropped to $2.1 trillion in the third quarter, down 1.1% from the second quarter, the Commerce Department said Tuesday. Compared...
Profits at U.S. companies during the third quarter posted their largest annual decline since the recession, underscoring the competitive pressure from a strong dollar and weak global demand that could limit businesses’ ability to support stronger economic growth in the coming months.
A comprehensive measure of companies’ profits across the U.S.—earnings adjusted for inventory and depreciation—dropped to $2.1 trillion in the third quarter, down 1.1% from the second quarter, the Commerce Department said Tuesday. Compared with a year earlier, profits fell 4.7%, the biggest annual decline since the second quarter of 2009. That marked only the second time profits have fallen on a year-over-year basis since the recession ended in mid-2009.
Economists warn weak profits could weigh on business investment, put pressure on stock prices that some analysts think look expensive, and pose a challenge for Federal Reserve officials who are trying to raise interest rates after seven years of near-zero rates.
“Profits are slowing, there’s no way around that,” said Deutsche Bank chief U.S. economist Joseph LaVorgna. “These are things that suggest we’re past the midpoint of the business cycle, unfortunately, but it doesn’t mean we can’t run this [expansion] a bit longer.”
The downbeat profit figures came in a revision of overall gross domestic product, which climbed at a 2.1% seasonally adjusted annual rate in the July-to-September period, up from an initial estimate of 1.5% growth. That was largely due to a smaller drag from private inventories as companies didn’t let their stockpiles dwindle as much as initially estimated.
Despite the upgrade to third-quarter performance, the growth pace marked a sharp slowdown from the second quarter, when the economy expanded at a 3.9% rate. Overall, economic growth has hovered around a modest 2% rate for the past several years, with no sustained breakout for the economy since the end of the recession in 2009.
U.S. companies’ profits plunged during the recession then rebounded in the early stages of the recovery. But they’ve been trending lower for years, a reflection of slow growth abroad and moderate growth at home. Profits as a share of overall economic output have shrunk to 11.4% in the third quarter from a recent peak of 12.5% in 2012.
The latest reading highlights the divergence between domestically oriented operations and U.S. companies’ overseas operations, where the stronger dollar has effectively made U.S. products more expensive and global weakness has undercut demand.
Tuesday’s report showed domestic profits rose $7.3 billion in the third quarter, or 0.4%, which was entirely the result of higher profits at nonfinancial firms. Domestic profits were down 2.8% from the third quarter of 2014.
Meanwhile, foreign profits fell by $30 billion, a 7.4% decline from the second quarter and 12.2% drop from a year earlier.
Economic conditions in the U.S. remain “mixed,” with unemployment improving but consumers remaining cautious, executives at soup maker Campbell Soup Co. said in a call with analysts on Tuesday. And overseas markets are coming under pressure as well.
“We’re continuing to see Americans save more and spend less amid the uncertain economic climate,” Chief Executive Denise Morrison said. “Outside the U.S., we’re seeing macroeconomic challenges in other markets where we have significant operations, including Canada, China and Indonesia.
“Generating growth in this environment,” she added, “has been and remains difficult.”
Delta Air Lines Inc. last week also illustrated the split in global fortunes, saying it was increasing capacity in the U.S. even as it cut back internationally.
“We’re actually growing in the United States. Our capacity is up 3% in the U.S.,” Delta Chief Financial Officer Paul Jacobson told analysts. Capacity was down 4.5% internationally, primarily in the Pacific region, “where overcapacity and currency challenges have really stood in the way of a robust economic growth perspective.”
Companies are facing challenges in economies across Latin America and Asia hit by the fallout from China’s economic slowdown.
“China in the third quarter was obviously very tough,” Delphi Automotive PLC Chief Executive Kevin P. Clark told analysts last week. “South America has been lousy all year.”
Mr. Clark projected vehicle production in the U.S. would rise 3% next year, with Europe finally facing “a long runway of relatively moderate growth.” China is likely to grow more slowly than had been expected a year ago, he added.
“And then South America was terrible last year, is terrible this year, and I would tell you probably won’t be great next year,” Mr. Clark said.
The slowdown in profit growth has also tracked slower real final sales of domestic product, a key measure of underlying demand for goods and services in the economy excluding changes in inventories. It increased at a 2.7% pace in the third quarter, down from an earlier estimate of 3% growth.
Tuesday’s report also showed business investment—reflecting spending on construction, equipment and research and development—rose at a 2.4% rate, a relatively subdued pace more than six years into an economic expansion. “We expect the outlook for corporate profits to remain challenging given the strong dollar, rising labor costs…and weak external demand,” BNP Paribas economists Bricklin Dwyer and Laura Rosner said.
The difficult climate comes as the Fed prepares to raise interest rates for the first time in a decade at their Dec. 15-16 meeting, a move that could end one of the loosest lending environments companies have ever seen.
Economists generally said the latest figures are unlikely to dissuade Fed officials from moving in December. “Although the recovery from the Great Recession has been disappointing at times, the positive flip side is that a six-year run of moderate growth has prevented the economy from overheating,” PNC senior economist Gus Faucher said in a note to clients.
However, softness in the corporate sector means the Fed may need to stick to an even lower trajectory of rate increases in the coming years, said ITG Investment Research chief economist Steve Blitz.
One potential bright spot in the overall picture has dimmed a bit. Consumer spending, which accounts for more than two-thirds of economic output, increased at a 3% rate in the third quarter, down from an initial estimate of 3.2% and from the second quarter’s 3.6% pace.
Write to Kate Davidson at kate.davidson@wsj.com and Theo Francis at theo.francis@wsj.com