A pretty good article I thought is on the front page of Monday's IBD. It gives some good insight into the present economic condition in the U.S.
investors.com
Sales Lag Profit Gains; Wall St. Wants To See More Top-Line Growth
BY JONAH KERI
INVESTOR'S BUSINESS DAILY
As the reporting season winds to a close, Wall Street has mostly given a thumbs-up to company earnings. The new target of the Street's ire? Sales growth.
Heavy cost-cutting has fueled recent improved profits, pundits have argued. But they say sales growth has stagnated. With costs already slashed to the bone, only a surge in sales will push corporate profits and the economy forward.
The numbers seem to bear out those concerns, says Chuck Hill, director of research for Thomson First Call. With 89% of the S&P 500 companies reporting, those firms posted total year-over-year earnings growth of 9.3%. Sales were up 6.6%. Those figures should climb to just under 10% and 7% when all the S&P 500 firms are in, Hill predicted.
In the first quarter, earnings advanced 11.7%, sales 9.9%.
Now dig a little deeper. In the first quarter, energy companies' revenue grew 46%. Strip out energy, and S&P sales growth was just 6.8%. In the second quarter, energy firms' sales rose 20%. Strip out energy again, and Q2 sales have gained just 5.3%.
That's not all. The weaker dollar boosted sales for scads of companies. The consensus says it's boosted S&P 500 sales by 1.5% to 2.5%.
Sales Sluggish
"So you back out energy and the impact of translating overseas sales at a higher rate, and now we're in low single digits," Hill said. "That's not going very far."
The profit-sales gap is even wider with techs, which have led the market. In the first quarter, tech earnings climbed 17%. But sales edged up just 2%, a sign that cost-cutting fueled most of the profit bulge. In the second quarter, tech profits jumped 21% on 4% sales growth.
Back out the weak dollar's impact and you get flat sales in Q1 and 2% sales growth in Q2.
How do current sales stack up against previous recoveries? It depends on which recession. Sales growth is typically slow to recover as firms slash capital spending and other costs and consumers react slowly to the recovery.
The 2001 recession was shallow, a lot like the prior downturn from July 1990 to March 1991. In second-quarter 1991, sales rose 2.9%. They headed south for a 3.2% year-over-year decline three quarters later, and didn't bounce back over 3% until third-quarter 1992. And inflation, much higher than today, wiped out much of that.
After the severe recession of July 1981 to November 1982, fourth-quarter '82 sales fell 2.8%. A year later, sales growth rose back above 3%. By first-quarter 1984, sales growth had hit double digits and stayed there throughout 1984.
The U.S. economy grew at a faster-than-expected 2.4% annual rate in the second quarter. A lot of that was due to surging defense and other government spending. Strip out those factors, and GDP grew less than 2%. Economists say the U.S. needs to grow at least 3% to spur hiring.
"You had the market rallying 15% (more on the Nasdaq), interest rates down to 1% and people saying 2.4% GDP was a big surprise," said Rob Stein, investment advisor and economist for Astor Asset Management and publisher of a newsletter, updated daily, at astorllc.com.
"It was like living in Chicago in the winter and it's 10 degrees every day. People get excited when it gets up to 25 degrees."
Unemployment remains high, with few signs of meaningful job growth ahead, Stein notes. Retail sales growth has slowed to below 5%. If jobs don't pick up, people could keep more money in their wallets, he says.
David Blitzer, managing director and chairman of the index committee at Standard & Poor's, offers a more bullish view of the economy and its impact on the stock market.
"As economic, sales and earnings data continue to roll in, people are going to be at least satisfied, if not pleasantly surprised," Blitzer said.
The economy appears to be picking up steam in the second half. Jobless claims have hit a six-month low, retailers had strong July sales and manufacturing is starting to turn higher.
The moment of truth for the economy — and perhaps, by extension, the market — may come when corporate sales rise enough to trigger new capital spending.
"The economy remains a show-me economy," Cisco Systems (CSCO) CEO John Chambers said Aug. 5 after the networking giant posted its second straight quarter of falling sales — and forecast another decline this quarter.
"CEOs will wait to spend until they see that their own profits pick up. I can say for the first time in a long time that we are seeing some signs of improvement, but while things are starting to look better, it is still fragile." |
