Corporate profits have slowed in Q3, and U.S. economic growth most likely slowed in Q4 as well, but analysts say talk of a recession may be slightly premature.
Corporate profits fell to an annual rate of $19.3 billion in Q3 as domestic earnings dropped by $41.2 billion, according to U.S. Commerce Department data. The U.S. economy is being hurt by sluggish retail sales and write-downs in the subprime mortgage sector; the two have been offset by strong earnings abroad, but the domestic side may outdo the international side in Q4.
"The earnings recession has already arrived,'' said David Rosenberg, North America economist for Merrill Lynch (NYSE: MER) in New York told Bloomberg News. "We are going to see an economic recession in '08.''
The Institute of Supply Management's manufacturing index for November 2007 totaled 50.8, above the consensus estimate, but slower than October 2007's reading of 50.9. Any reading above 50 indicates economic expansion.
No recession yet
Given that the ISI reading is still above 50, analyst C. Leonard Bauer, formerly of Prudential, told BloggingStocks that talk of a U.S. recession is premature. In general, many economists expect the U.S. economy to grow 1.5%-2% in 2008. Some economists may end up revising their projections downward after anticipated sluggish Q4 2007 statistics are in. Bauer won't be one: he sees 2.1%-2.3% U.S. GDP growth in 2008.
Bauer said the subprime mortgage sector will continue to act as a drag on the economy in 2008, but adds that the U.S. economy may receive some pleasant surprises regarding retail sales, oil, and auto sales.
"Oil prices should moderate some in 2008, to an average of $70-$80 per barrel, and that will provide modest stimulus," Bauer said Monday. "Everything's relative and if you said $80 oil would be moderate five years ago, people would have laughed, but the $10 drop should help the consumer. Talk of a U.S. recession is premature."
Further, that moderately more confident consumer should end up spending more than most analysts think in 2008, in Bauer's interpretation:
"Retail sales will remain a mixed bag, but overall they will be higher than the 2%-3% growth range most are projecting," Bauer said. "The home equity cash kitty is gone, but the workforce is still expanding and as long as job growth continues, retail sales will hold up reasonably well."
Auto sector bottomed?
Further, Bauer added he expects the auto industry to provide a mild stimulus after years of employment cutbacks and balance sheet woes.
"We're not talking about a robust auto sector here, but one that will improve slightly, to about 15.7 million to 16 million cars sold in 2008," Bauer. "The analysis suggests an upside is more likely for Ford (NYSE: F), General Motors (NYSE: GM), and Chrysler, and that will also help the economy some."
Bauer also said that there is "not an inevitability" to the slowing of corporate profits, noting that corporate profits slowed in 1997, but a recession did not hit the U.S. economy until 2001. Further, corporate profits could re-accelerate, as they did in 1999 and 2000.
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