Hollow gains

US company profits are at a new high as a share of GDP. Yet, estimated first-quarter output showed a 2.1 per cent rate of decline in private sector non-residential investment. True, the US economy’s non-government sector grew solidly. But weak investment bodes ill for the medium term.

Friday’s headline figure for real GDP growth in the first quarter — 2.2 per cent on an annualised basis — was below expectations, but had positive elements. Inventory growth, which often doesn’t last, contributed much less than in the last quarter of 2011. And, federal, state and local government output declined. Gross private product, which excludes government activity, grew at a 3.4 per cent annual rate in the quarter, slower than the 4.6 per cent growth in the prior quarter but still a healthy clip.

The decline in non-residential investment was the most disquieting feature, despite a big jump in residential investment – something that suggests the housing sector has finally bottomed out. The problem is that companies don’t seem to be investing even with corporate profits running above 10 per cent of gross domestic income in the fourth quarter of 2011, in record territory. According to Standard and Poor’s, earnings reported by companies in the S&P 500 Index are on track to increase 6.7 per cent in the first quarter from a year earlier.

Rocketing investment should be one result of such robust-seeming profit. That’s what happened in the dot-com bubble years. Its absence could be due to uncertainty or subdued expectations for the future. In either case, the decline, albeit modest, suggests potential future problems on the employment front since job creation generally follows from investment.

Though the latest data point is the first and roughest of three official efforts to estimate first-quarter GDP, the White House will be watching. Any rebound in investment may not have a noticeable impact until well after November’s elections. But with economic growth one of the more reliable indicators of an incumbent’s electoral success, President Barack Obama will be hoping the headline figures between now and November are nearer the three per cent growth rate seen in the fourth quarter.