I thought this article by Irwin Kellner was an excellent summary of a lot of the topics we have discussed in the last month or so. I also responded to my own post #3951 because Irwin's article is based on the economic data in that post. I think a lot of average investors are missing the significance of that government report. I put my comments in italics.
MikeM(From Florida)
Slowdown in Growth Could be 'Sudden' Corporate Profits, Stock Values at Risk
By Irwin Kellner
NEW YORK May 29 -- There is an old expression, "Be careful what you wish for, your wish may come true." For weeks, if not months, the markets have been waiting anxiously for signs of a slowdown in economic growth. Such a softening was needed, so it was said, to keep inflation pressures in check and the Federal Reserve's fingers off the interest rate button.
This was that line that got pretty old, "Asian crisis is good for the US."
This week investors got what they wished for, and they didn't like it. Although you wouldn't know it from the first quarter's upward-revised growth rate of nearly 5 percent, the slowdown has apparently hit with enough force to knock corporate profits for a loop. First-quarter earnings fell by 2.2%, on the heels of a similar drop in the fourth quarter. What is more, further declines appear likely, in view of the spate of earnings warnings that have reached the Street in recent days.
Remember the old "Asia did it to us" statement in Q4 97 and Q1 98.
It's not too difficult to see why earnings are being squeezed. Prices are virtually stable, prohibiting many companies from recouping increases in the cost of labor, commodities, taxes and utilities. Furthermore, the rise in the value of the dollar translates into reduced earnings from other countries since foreign currencies translate into fewer dollars on U.S. companies' balance sheets.
Cheaper Asian imports force US producers to hold the line on price increases. If expenses rise, it squeezes profits. And of course a strengthening US$, means converting back profits from foreign subsidiaries back to US$, means less profits (We never talked about this one).
As for the future, all you have to do is look at the composition of the first quarter's growth. Thirty percent of it was traced to a record rise in business inventories, a category that only accounts for 1 percent of the overall gross domestic product.
This is the empty containers going back to Asia discussion we had.
Add to this the deterioration in our trade balance because exports are slowing while imports are rising and the conclusion is inevitable that U.S. factories will be churning out goods at a slower pace in the months ahead.
The Asian crisis hitting our shores is inevitable. When, and how severe, are the unknowns.
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