U.S. corporate earnings have shined in recent quarters, but the outlook for the third quarter looks dim, according to The New York Times.
Many companies in the second quarter cut forecasts for growth for the year, and with the third quarter coming to an end, the biggest American companies are projected to post their first quarterly decline in earnings since 2009 thanks to dwindling sales growth, the newspaper reported.
The economy has slowed, and while profits might have come in strong in recent quarters due to cost cutting and other measures, a cooler U.S. and global economy will hit the top line for many firms.
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
“A lot of the profit gain you had in the last few years was a bounce from the recession and a result of very aggressive cost cutting,” said Ethan Harris, chief U.S. economist at Bank of America Merrill Lynch, The Times added.
“Those factors are going to be very hard to replicate.”
According to Thomson Reuters data cited by The Times, analysts expect earnings for the typical Standard & Poor’s 500 Index company to decline 2.2 percent in the third quarter from the same quarter last year.
In addition, 88 companies have warned that their results will be below expectations, while only 21 have signaled a positive outlook, Greg Harrison, corporate earnings research analyst at Thomson Reuters, told The Times.
“That’s much more pessimistic than normal,” Harrison noted.
Many firms have held up on hiring in recent quarters to save on costs, though the result has been high unemployment rates that have cut into demand.
Corporate sentiment appears to be waning as well, with just over half of managers at North American companies expecting production levels to increase in the next 12 months, down from 64 percent in the second quarter, according to a survey by CEB, a member-based advisory firm.
“We’re sort of like in this limbo environment,” said Gregory Swienton, chief executive of Ryder, the truck rental and transportation company, according to The Times.
“I’d love to be able to say we’re hiring, but there is no natural big growth that would require hiring.”
On top of a cooling economy and prolonged uncertainty, other factors are prompting businesses to put capital spending and hiring on hold.
At the end of this year, the Bush-era tax cuts and other tax breaks are set to expire, while preprogrammed cuts to government spending kick in, a combination known as a fiscal cliff that could send the country sliding into recession next year if left unchecked by Congress.
On top of fears of a fresh economic contraction, many firms don’t know how much in taxes they’ll be paying next year, which is holding off on investing and hiring today and dampening already tepid growth rates.
Some estimates see the fiscal cliff siphoning $700 billion out of the economy next year alone, though President Barack Obama and Congress will likely strike a deal early in 2013 and adjust the timing and scope of tax hikes and spending cuts on a retroactive basis to avoid recession, experts say.
Still, expect some drag on the economy, said Neel Kashkari, managing director and head of global equities at fund giant Pimco, which expects a deal will be made to defer all but $250 billion of the tax increases and spending cuts.
“With our outlook for the U.S. economy being quite slow growth, 1.5 to 2 percent growth, a $250 billion fiscal drag is a pretty significant headwind, given our slow economic growth,” Kashkari told Bloomberg.
“So we think we’re going to avoid recession, but it is going to be a meaningful drag on the U.S. economy.”
Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.
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