About Those Earnings (part II)

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Earlier this week, I noted that the Bullish camp likes to trot out the headline earnings data as proof of ongoing economic strength. In About Those Earnings, we specifically noted "One of the main Bullish arguments has been that very strong Earnings are not signalling a major slowdown." After all, 14 consecutive quarters of year-over-year double digit growth is no Bearish signal.

I describe this growth as "lumpy." It is highly concentrated by sector and cap size, and is not evenly distributed:

"Energy companies have recorded 50% growth in net income, while financials grew by 19%. Exclude those two groups, and net income is down 1.1%, in part due to significant dropoffs in basic materials (down 12%), consumer goods (off 11%), health care (37% lower) and technology (down 4%), and a 13% decline in telecommunications."

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In a healthier environment, we should expect to see earnings growth broaden out across many more sectors in the economy. Instead, the growth is narrowing. The biggest gains are in a few sectors, and primarily in companies in big cap firms (like the S&P500 members).

But its not just me (or the perma-bears, pessimists or eeyores) who have noted this. The latest data to recognize this comes from the Commerce Department. The WSJ observed that the latest release on Corporate Profits admits:

"A slowing economy put the brakes on torrid growth of corporate
profits in the second quarter, and rising labor costs could increasingly limit
earnings growth in the months ahead.

The Commerce Department said pretax corporate profits in April,
May and June collectively rose 3.2% from the previous quarter, much slower than
the 12.6% jump in the first quarter or the 10% jump in the fourth quarter of
2005
. Nonetheless, profits in the second quarter were 20.5% higher than a year
ago and accounted for 12.2% of gross domestic product in the second quarter, the
highest level in 40 years."

So while year over year growth remains strong, it has begun to slow sequentially.

Source:
Corporate Profit Growth Slows in Step With Economy
CHRISTOPHER CONKEY
August 31, 2006; Page A3
http://online.wsj.com/article/SB115694086605749436.html

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What's been said:

Discussions found on the web:
  1. MeanGene commented on Aug 31

    While watching the GDP numbers come in yesterday on CNBC, a brief mention was made about “total corportate profits”. I understood this is a number buried in the report that Wall St takes little or zero notice of. Supposedly is counts all corportate profits including small and medium sized private business. That number took a big dip, if my memory is correct 14% negative. The comment was made that the last time it was so negative was 1998.
    I would like to see some more info on that. Seems to me it would be more of a leading indicator of what’s really going on in the economy.

  2. Chief Tomahawk commented on Aug 31

    Somebody called Nouriel Roubini an “Eeyore” the other day and I see he has taken to wearing it as a badge of honor with it’s inclusion to his blog. Elsewhere, things got testy enough between Arthur Laffer and Peter Schiff on Kudlow’s show Monday they have a penny bet riding on who’s going to be right about the economy going forwards.

  3. Craig commented on Aug 31

    Laffer should simply send Peter his penny, it’s a forgone conclusion. Something tells me Peter is going to make more than a penny on his thesis.

  4. Geoff commented on Aug 31

    Laffer…it’s really a joke that they will STILL trot this guy out there…kind of like Fox dragging up Jack Kemps corpse. How many times do we have to prove these people wrong?

  5. Cherry commented on Aug 31

    Actually those numbers aren’t that healthy.

    .8% equates a 9.6% annual rate roughly. YOY increases, in the BEA online tables are 2.4% for personal spending. 2.4% isn’t much to brag about and spending grows so will GDP, which isn’t a good sign. So we have a gradual slowing to a less than steady state. August wasn’t as good as July, so you have a lesser number.

    I don’t know why people care about retail right now. That comes later. Right now collapsing fixed Res. investment is what non-Res. investment was to the dot.com bust. Considering that the housing industry JUST NOW is cutting back production and labor, we have a ways to go, but the bottom is going to be worse than people expect, hence recession. Then we look at retail. If they go really bad, then the economy will hit the skids even deeper.

  6. BDG123 commented on Aug 31

    BOOYAH! The consumer is healthy! The consumer is resilient!

    Wait till you start to see companies cutting production in the 3-4Q to ameliorate inventory turds dropping all around you. Then they’ll start announcing layoffs. Then we’ll see how resilient things are.

  7. Michael C. commented on Aug 31

    Odds for a rate CUT at the Jan 31, 2007 meeting are now 22% from 8% yesterday per Tony Crescenzi at RM.

    I shudder at what kind of news it would take for the Fed to actually cut rates.

    But hey…. are we still buying?

  8. darkroth commented on Aug 31

    Interesting how earnings growth looks good till one takes a closer look. Just like “Real After-Tax Income Has Risen By 13.5 Percent Since January 2001.” [http://www.whitehouse.gov/infocus/economy] No mention of the fact that the gap between the high and low earners has also grown, and the implications of that for average after-tax income.

  9. Mark commented on Aug 31

    Ya gotta hand it to the bulls here. This is about 150 points north of where I was guessing they’d run into big trouble.

    Gives me room to set out my short line though….

  10. Barry Ritholtz commented on Aug 31

    1305-1310 — my numbers are unchanged

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