Corporate America showed profit again, but only by spending less, not making more. While recent bullish corporate profit reports have energized the stock market, a true economic recovery will depend on consumers spending. So far, there’s little evidence of that.
Big industries leaders such as Caterpillar, IBM, Whirlpool, Pfizer, 3M and Lowe’s boosted profit forecasts for 2009 following a slew of second-quarter earning reports that impressed analysts. Yet the gains aren’t coming from sales. Rather, companies are cutting on everything from jobs to officer perks to boost the bottom line and please investors. In turn, investors have responded by pushing the major stock indexes to their highest levels in months.
Why this might be bad?
None of this is getting us out of a recession! The increase in the major stock indexes is raising questions about whether investors are getting ahead of themselves. Companies can only cut costs so much, and the profits and the stock surge aren’t likely to last without a sustained economic recovery that puts people in the mood to spend again. Cost saving is not going to be the source of future earnings. The source is going to be revenue, and that can’t happen until the economy starts growing.
What is the benefit?
Many companies are taking steps that could lead to even better year-over-year earnings growth in the third and fourth quarters. Last year, companies were unprepared for the plunge in consumer spending that followed the credit crisis and stock market collapse in September and October. Revenue fell sharply, but there wasn’t enough time to cut costs, so profits tumbled.
Now, frugality and months of cost reductions are paying off. The Standard & Poor’s 500 stock index jumped 44 percent since early March, while the Dow Jones industrials jumped above 9,000 Thursday for the first time since early January. On Friday, the Dow rose 23.95, or 0.3 percent, to 9,093.24. Of the nearly one-third of the nation’s largest companies that have reported second-quarter earnings so far, 76 percent have topped analyst expectations, according to Thomson Reuters. And despite the severity of the downturn, less than a fifth of U.S. companies are losing money. Companies have done extraordinary belt-tightening.
Future Profit Reports
If all these companies do is cut costs and they can’t find ways to expand revenue, all they’re doing is shrinking and that’s not bullish. Companies have cut spending in big and small ways. For example, at Google, employees no longer get free bottled water. Starbucks, meanwhile, has closed hundreds of stores.
However, for earnings to keep rising, consumers must start spending again. And unless economic activity overseas improves, U.S. companies that do business abroad will continue to suffer, dragging down everyone. The dismal spending climate has hurt big companies like Microsoft and Amazon.com, which reported disappointing quarterly earnings last week.
At IBM, layoffs, automation and other cost-cutting measures helped the company small quarterly earnings projections last week. The revenue picture was less encouraging. IBM’s sales dropped 13 percent to $23.25 billion, below the $23.59 billion predicted by analysts. Still, the company raised its full-year profit forecast.
Ford Motor Co. notched a $2.3 billion profit in the second quarter, a year after suffering the worst loss in company history. The surprise gains came as the struggling Detroit automaker reduced debt and trimmed its payroll, including 1,000 blue-collar job cuts through buyout and early retirement offers. Ford had little choice to cut back to offset flagging sales, which fell 14 percent in June compared to the same month last year. Even the battered banking industry is joining the earnings rally, Wells Fargo & Co., Bank of America Corp. and Citigroup Inc. all posting profitable second quarters.
The gains stand in marked contrast with the stunning losses and financial market upheaval seen only six months ago. Gone are the days when experts fretted about the possibility of another depression. Now the talk centers on whether the economy will recover early next year, and the question is whether it will happen fast enough for many companies. Regardless of all opinions, now is the time of economic Darwinism, where only the strong survive.
