Nov. 25 (Bloomberg) -- Profits at U.S. companies climbed in the third quarter by the most in five years as earnings at banks surged.

Corporate profits rose 11 percent from the prior three months to $1.36 trillion, the biggest gain since the first quarter of 2004, the Commerce Department reported yesterday in Washington. Domestically, earnings at financial institutions jumped by $97 billion, or 36 percent, while those at other companies climbed by $12.9 billion, or 2 percent.

Firms from Goldman Sachs Group Inc. to Morgan Stanley boosted results last quarter through trading as financial markets continued to rebound from the declines that followed the collapse of Lehman Brothers Holdings Inc. last year. Other companies prospered by cutting costs, indicating they will not be quick to boost payrolls.

“The weakness in the non-financials tells you how limited this recovery is at this point,” said Joel Naroff, chief economist at Naroff Economic Advisors Inc. in Holland, Pennsylvania. “Businesses are going to be very cautious in increasing the cost side, and the biggest part of the cost side is labor. They aren’t going to rush out and hire.”

The profit figures, included in the Commerce Department’s report on gross domestic product, were the first look at total earnings. The data showed the world’s largest economy grew at a 2.8 percent annual pace from July through September, less than the government estimated last month, as consumer spending trailed forecasts.

Record Surge

In the first three quarters of 2009, profits at financial institutions soared 198 percent, the biggest nine-month gain since records began in 1948. Earnings were down 65 percent in the nine months ended in December 2008, the biggest such decrease on record.

“The financials were a basket case,” said Naroff. “The companies are coming off such a low basis that it’s easy to get a big increase.”

The Standard & Poor’s Financial Supercomposite Index has climbed 123 percent since March 9, compared with a 63 percent gain in the S&P 500 Index. The S&P 500 fell to a 12-year low on March 9.

The jump in profits is probably not evenly distributed among banks, said Naroff, making it less likely that the money will find its way back into the economy in the form of loans.

“Unfortunately, not every company is a Goldman,” Naroff said. “Not everyone is going to make tons of money.” The banking system’s ability to boost lending and spur business investment “will look more like a slow stream than a river.”

Purchases of equipment and software increased at a 2.3 percent pace last quarter, yesterday’s GDP report showed.

Goldman, JPMorgan

Goldman, the most profitable securities firm in Wall Street history, posted earnings of $3.19 billion last quarter, following a record $3.44 billion the previous three months. Third-quarter earnings at JPMorgan Chase & Co., the second- largest U.S. bank, were the highest since the subprime mortgage market collapsed in 2007.

Morgan Stanley’s earnings were $757 million in the third quarter after an increase in risk-taking boosted trading revenue and contributed to the bank’s first profit in a year.

Nariman Behravesh is among economists who said last quarter’s reading on profits was good news for the economy.

“The profits numbers are the single-biggest piece of good news in this report,” said Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. The gain “was lopsided, and that is a concern. But even that is good news. Obviously the banking system is healing and its balance sheet is increasing, and that is a necessary condition for a more broad-based recovery in the economy.”

President Barack Obama has asked Treasury Secretary Timothy Geithner and Small Business Administration administrator Karen Mills to convene a conference of regulators, congressional leaders, lenders and entrepreneurs to come up with additional steps to improve the flow of credit to small businesses looking to expand.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: November 25, 2009 00:00 EST