With profits falling, will recession follow?

NEW YORK – In terms of U.S. corporate profits, “The earnings recession has already arrived,” David Rosenberg, North America economist for Merrill Lynch & Co. in New York, told Bloomberg News, adding: “We are going to see an economic recession in ’08.”
Corporate profits fell at an annual rate of $19.3 billion in the third quarter, compared with the preceding period, after rising $94.7 billion in the second quarter, according to the latest figures from the U.S. Bureau of Economic Analysis. “In the third quarter, the tide shifted, and for the worse,” Joseph Quinlan, chief market strategist for Bank of America Corp. in Charlotte, N.C. “The domestic-profits squeeze is in its early stages and will be severe enough to overwhelm strong foreign earnings”
Among financial corporations, domestic profits fell $29.1 billion in the third quarter, after rising $52.7 billion the quarter before, while among nonfinancial corporations, domestic profits fell $12.1 billion, after rising $25.3 billion in the second quarter, the BEA found. Rest-of-the-world profits for financial and nonfinancial companies combined rose $21.9 billion, accelerating from the second quarter’s $12.1 billion gain.
Among companies in the Standard & Poor’s 500, average profits per share fell nearly 25 percent compared with the 2006 third quarter, in what Bloomberg said was the largest year-over-year decline in nearly half a decade. S&P’s chief economist, David Wyss, anticipates those companies’ earnings may fall as much as 30 percent in the fourth quarter as companies take more writedowns for bad investments, and even excluding such one-time costs, their operating profits may fall.
But not all analysts agree that a decline in corporate profits means a recession is on the horizon for the broader economy. Steven Wieting, managing director of economic and market analysis at Citigroup Global Markets Inc. in New York, noted that after the last expansion, profit margins began to shrink in 1997, but no recession was seen until 2001.
Additional information, including the “Corporate Profits: Third Quarter 2007” preliminary report released Nov. 29, is available from the U.S. Commerce Department’s Bureau of Economic Analysis at www.BEA.gov.