more swell news ANALYSIS-Hopes soured on U.S. earnings rebound this year
By Nichola Groom
NEW YORK, June 14 (Reuters) - The recovery in earnings that companies and investors were hoping for in the second half of the year could turn out to be a mirage.
With Corporate America's second quarter results already certain to be dismal, attention has switched to whether there could be a pickup in the third and fourth quarters. But the omens are increasingly bleak, analysts warned.
Consumer spending on new homes, autos, leisure and at the nation's discount stores has kept the economy out of recession and provided some comfort to those who thought the earnings downturn, while sharp, would be short-lived.
But a second wave of job cut announcements in recent days, indications that the technology meltdown is far from over, and signs that the only way many consumer products companies can shift their goods from store shelves is through heavy discounting, are threatening to undermine those hopes.
"A slow attrition in work force and slow climb in unemployment will undermine consumer confidence," said Ned Riley, chief investment strategist with State Street Global Advisors, told Reuters. "One looks to consumption as either the savior or the millstone of the economy."
Second-quarter earnings are expected to come in about 15 percent lower than last year, according to Thomson Financial/First Call, which tracks earnings estimates. A decline of 4.3 percent is forecast for the third quarter and a rise of 7.2 percent is expected in the fourth quarter. "But those numbers are going to come down a lot," warned Thomas O'Keefe, research analyst at First Call.
The latest jobless figures do not bode well for the consumer sector. The number of first-time claims from workers for state unemployment benefits last week reached its highest level in almost nine years, the government said in a report on Thursday.
While some companies are reporting buoyant sales -- the automakers for example -- those are often being achieved at a cost, as incentive schemes, expensive low financing offers, and straight discounts are used to lure buyers.
Indeed, a flick through some newspapers might give the impression that the nation's retailers and consumer product makers are in the middle of a fire sale, as retailers, computer makers and others advertise "Biggest One Day Sale of the Season," and "Blowout Sale."
Disappointing news from the retail sector has been most troubling, experts said, as U.S. retail sales growth slowed to just 0.1 percent in May from 1.4 percent in April, the Commerce Department said on Wednesday.
Big retail names such as Gap Inc. <GPS.N> and Federated Department Stores Inc. <FD.N>, have warned of further weakness in sales or earnings amid an increasingly soft retail environment
One of the biggest dangers is that companies will see the latest set of data as a reason to postpone capital spending or make harsher cuts in production and jobs, creating a downwards spiral for consumer spending and the economy.
"Maybe they'll spend like drunken sailors at the end of the year, but they aren't doing it up until then," Michael Birck, chairman of telecom equipment maker Tellabs Inc. <TLAB.O>, said of spending by telecom carriers.
CONSUMER SECTORS FACING HARD TIMES
Prospects of an earnings recovery in the third quarter have already been written off by Wall Street as more and more firms have warned about weak demand, and a similar prognosis for the fourth quarter could quickly loom as profit warnings in the consumer sector stack up.
No. 1 U.S drugstore chain Walgreen Co. <WAG.N> said on Thursday that the economic downturn was stifling nonprescription
sales.
"The front-end of our business is feeling the downturn in consumer spending a little bit. We are running sales in the front-end not quite as strongly as we would like," Chairman and Chief Executive Officer Daniel Jorndt told Reuters in an interview.
Earlier this week No. 3 U.S. home appliance maker Maytag Corp. <MYG.N>, cut its second-quarter earnings forecast by 25 percent due to flagging sales of its Hoover vacuum cleaners, while food maker H.J. Heinz Co. <HNZ.N> warned that earnings in the current quarter would fall short of Wall Street estimates due to the impact
of the strong dollar.
Of the companies that make up the Standard & Poor's 500 index, 121, or almost a quarter, have lowered earnings guidance since Feb. 1, up from 112 in the previous three months and only 16 in the year-earlier period, according to First Call.
"The third quarter will be a repeat of the second," Chuck Hill, director of research at First Call, told Reuters. "The fourth quarter will probably be flat at best, but could it be down 10 percent because of weak capital spending? Yes."
Sectors most vulnerable to consumer spending patterns include the housing, auto, and airline industries, all of which have taken turns for the worse in recent weeks.
In April, sales of existing U.S. homes fell 4.2 percent, according to the National Association of Realtors. Sales of new single homes fell 9.5 percent in April from March -- the sharpest drop in four years, according to the U.S. Commerce Department.
The auto industry is providing mixed signals.
On Tuesday, No. 2 auto maker Ford Motor Co. <F.N> announced it was expecting its third quarter North American production would be 10 percent lower than in the year-earlier period but on the same day Deutsche Banc Alex. Brown predicted June would be a "blowout month" for auto sales. However, the key reason for its optimism was "very aggressive incentives" unveiled by the Big Three U.S. automakers.
Airlines, facing large cutbacks in corporate travel spending, have resorted to similar tactics, keeping fares low to get more travelers on planes. Earlier this month, both Continental Airlines Inc. <CAL.N> and United Airlines, a UAL Corp. <UAL.N> unit, said that passenger revenue declined markedly in May versus a year ago
TAX REBATES OFFSET BY WEAK EUROPE
Experts differ as to whether tax rebates, expected to land in consumers' pockets during the summer months, are poised to prevent a plunge in consumer spending.
"The tax cut will help a great deal in second half of year because of rebates," said Milton Ezrati, senior economist with Lord Abbett & Co. "We've already come through the worst of the pressure on the consumer. It seems unlikely that he or she will react now if they didn't react earlier this year."
Not everyone agrees, though.
"I don't see where a one shot tax cut does you much in terms of changing consumer habits," Hill said.
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