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End to profits rise fuels US downturn fears
By Francesco Guerrera in New York and Eoin Callan in Washington
Published: March 29 2007 14:31 | Last updated: March 29 2007 23:12
US companies’ profits have begun falling after a prolonged period of growth, fuelling fears that corporate America is heading for a downturn.
The quarterly fall in corporate profits in the last three months of 2006 – revealed in official figures released on Thursday – will deepen Wall Street’s concerns over the ability of companies to increase earnings amid a slowing economy and rising cost pressures.
“Profits growth has turned decisively down and the end is not yet in sight,” wrote Gabriel Stein of Lombard Street research in a note to clients on Thursday. “One of the key points about the US economy in recent years has been the spectacular rise in corporate profits, in absolute terms and as a percentage of GDP. Now, there are clear signs that this is changing.”
Fears of an abrupt end to unprecedented period of profit growth have been one of the factors behind the US stock market’s recent woes. When Alan Greenspan, the former chairman of the Federal Reserve, raised similar concerns at the end of February, his comments sparked a sell-off in markets across the world.
The reduction will raise questions over whether the recent expansion in companies’s share of economic activity, which stood at just 7 per cent in 2001, is about to go into reverse. The rise in companies’ portion of national income has been the fastest since the collection of this data began in 1947.
The figures showed the US economy grew at a rate of 2.5 per cent last quarter compared to an initial estimate of 2.2 per cent. But economists said the figures were on balance a cause for concern about the economy.
Peter Kretzmer, an economist at Bank of America, said: “At issue is whether the recent capital spending slowdown may persist and – or – spread to softer employment gains.”
Ben Bernanke, Fed chairman, this week highlighted a new risk to growth from weak business investment after durable goods orders failed to bounce back in February after a fall in January.
The chairman said the risks to growth and inflation had increased in recent weeks but challenged expectations of early US interest rate cuts.
The figures on Thursday showed profits of US companies were down 0.3 per cent in the last three months of 2006, the first quarterly fall since the third quarter of 2005 when the economy was reeling from the effects of hurricane Katrina.
The fall in profitability reduced the company profits’ share of national income to 12.2 per cent from a more than 30-year high of 12.4 per cent in the previous quarter.
The flat company profits were viewed by economists as a sign that businesses are paring back investment in new technology and equipment but continuing to hire workers. The result, they said, was weaker profits, higher labour costs and lower productivity.
“Even given strong corporate balance sheets, this could point to reduced hiring and even job shedding in 2007, which in turn could add to downside risks for consumption,” said James Knightley at ING.
Drew Matus, an economist at Lehman Brothers, said: “Overall, the housing sector and business investment remains a worry for the economy, while the consumer continues to spend despite all the forces working against them.” |
