MarketWatch’s Kellner: Falling Corporate Profits Might Mean Falling Economy

Friday, 28 Sep 2012 09:37 AM

By Dan Weil

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Corporate profits are expected to decline this quarter from a year earlier, and that means trouble for the economy, says MarketWatch’s chief economist Irwin Kellner.

It’s no wonder that analysts’ forecasts call for profit declines, he writes, given “the number of companies cutting their expectations for the current quarter has risen to four times the number raising theirs. This is the weakest ratio in 11 years.”

Combine that with other signs of corporate weakness, and this suggests a profit decrease of 2 percent to 4 percent, Kellner says. That would mark the first decline since mid-2009.

Editor's Note:
Economist Warns: 50% Unemployment, 100% Inflation Possible

And profits “are like the canary in the coal mine,” Kellner writes.

“[W]hen it becomes harder for companies to eke out a profit, the first thing they do is look for places to cut costs. This means less spending on plants and equipment, goods and services — and their own payrolls.”

The bottom-line effect is on the economy, of course. “Before you know it, the entire economy is heading lower,” Kellner says

Gross domestic product growth slipped to 1.3 percent in the second quarter, and some experts say companies already are sitting on their hands.

"Businesses have just moved to the sideline in front of the election," Pierpont Securities economist Stephen Stanley tells The Wall Street Journal.

"They don't know what their tax outlook is; they don't know what their regulatory outlook is. If they don't have to make a decision at this point, they're not."

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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