Signs Of An Approaching Recession In Corporate Earnings Forecasts?
We’ve seen plenty of bad economic news over the past several months, and very little good news to counterbalance it. Last week, we learned that initial claims for unemployment jumped by 34,000 last week. Additionally, there were hugely disappointing Retail Sales figures for June, and several analysts have already started downgrading their GDP forecasts for the rest of the year, and on into 2013. To be honest, of course, a lot of this isn’t news. The economy has been in a recovery since 2009, at least according to official definitions, but it’s been one that has been incredibly weak and during which job growth has been sporadic at best. The one bright spot has been corporate earnings, which has done well for the past several years, a fact which Wall Street has acknowledging by gaining back most of the losses it suffered in the 2008 financial crisis. Now, it appears that even that may be coming to an end:
While this quarter’s earnings reports have crossed a substantially lowered profit bar, future expectations through the year indicate a recession could be on the way.
Estimates for the third and fourth quarters have been dropped to levels not seen since the days of the 2008 financial crisis, below even the muted 2 percent expected level of inflation.
That’s an ominous recession sign for an economy that has barely managed to attain positive growth this year even with the strong level of earnings beats, according to an analysis by Nicholas Colas, chief market strategist at ConvergEx in New York.
“Revenue estimates for the back half of 2012 have been slowly working their way lower this year,” Colas said. “This trend, however, has accelerated to the downside over the past 30 days and we are fast approaching levels where these estimates are unambiguously pointing to the risk of a U.S./global recession later into 2012 and 2013.”
For the current quarter, about 69 percent of companies in the Standard & Poor’s 500 have beaten analyst profit estimates. Only 42 percent, though, have beaten on top-line revenue estimates, indicating that growth is weakening.
That’s evidenced by a rash of downward forward revisions from analysts.
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Analysts now expect revenue to grow at just 1 percent to 1.5 percent pace in the third quarter. The forecast for the fourth quarter is 3.9 percent, though Colas says “I doubt any analyst could defend this point of view unless they expect a rapidly weakening dollar…or a truly epic round of liquidity-pumping operations from the world’s central banks.”
With another round of bad news out of Europe causing markets to decline today, that’s only likely to continue. Even if we don’t head into an official recession — meaning two consecutive quarters of negative GDP growth — it’s fairly clear we’re headed for further weakening of economic fundamentals between now and the end of the year at the very least.
There’s absolutely no chance of additional spending from either the government or non-government sectors: as made tangentially clear by James Joyner’s earlier post, the stagnation of real wages over the last forty years means households no longer have the capacity to restore economic growth on their own. In fact they no longer have sufficient income to save as the national rate has dropped to 3.4% from its 8% high in 2009.
To underscore what Ben said:
Why is it so difficult for our Captain of Industry – who are supposed to be omniscient Galtian wizards when it comes to using the Free Market to save us all – to grasp one of the most basic tenets of business?
You can’t sell things to people who have no money.
With the massive debt, artificial bond rates, and the decline of the dollar…another recession is a foregone conclusion. Whether it hits this year, next year, or 2014, it’s inevitable.
And lets not forget, US poverty nearing highest rate since 1960s, according to the AP. Whoever gets elected in November will have a hard time explaining how events elsewhere mean there is little he can do here.