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Gain in Income Points to Sustained U.S. Economic Recovery

June 25 (Bloomberg) -- American companies and households earned more in the first quarter than previously estimated, exceeding the gain in economic growth and indicating the recovery will be sustained, economists said.

Corporate profits increased by 8 percent from January through March to a $1.58 trillion annual rate, $35.5 billion more than calculated last month, revised figures from the Commerce Department showed today in Washington. Personal income climbed to a $12.2 trillion pace, $7.6 billion more than the prior estimate.

The income data were in contrast to figures on gross domestic product which showed a smaller increase in economic growth than calculated in May. Because earnings are based on surveys that cover a larger part of the economy, the numbers indicate growth is stronger than implied by gross domestic product, said economist Joe Carson.

“There may be a little more momentum there in the first quarter of the year than is being captured in GDP,” said Carson, director of economic research at AllianceBernstein LP in New York. “The income side still seems to be doing OK.”

Gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at a 5.3 percent annual rate in the first quarter, up from the 4 percent gain estimated last month, the revised figures showed. GDP expanded 3.9 percent in the first three months of the year before adjusting for inflation, less than the 4.1 percent gain previously calculated.

Boost Spending

The gains in profits and earnings “should support consumer and business spending,” Peter Newland, an economist at Barclays Capital Inc. in New York, said in a note to clients. It’s “supporting our view that the recovery continues to build momentum and that GDP growth will be stronger” this quarter than last, he said.

Consumer spending, which accounts for about 70 percent of the economy, grew at a 3 percent annual pace in the first quarter, less than the 3.5 percent gain reported last month, today’s revisions showed. The reduction reflected smaller gains in spending on services, the Commerce Department said.

An April paper by Federal Reserve economist Jeremy J. Nalewaik at the Brookings Institution in Washington showed earnings data may provide a more accurate picture of the economy. After multiple revisions over time, the government’s growth estimates tend to align more closely with the income figures, rather than the other way around, he said.

Diverging Data

While the income and GDP should theoretically match, the different methods used in calculating the numbers cause them to sometimes diverge.

The profit figures are “harder” than the growth estimates because they are tabulated using 10K reports, the summary of a company’s performance filed with the Securities and Exchange Commission, said AllianceBernstein’s Carson. Income revisions are based on tax data that cover almost the entire working population, he said.

By contrast, growth estimates are based on smaller surveys of companies until more comprehensive data is available, said Carson.

The disparity between income and growth may take a long time to be resolved, if ever. The Commerce Department will issue its annual benchmark revisions in July, which will update GDP figures as far back as 2007.

To contact the reporter on this story: Carlos Torres in Washington at Ctorres2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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