Corporate America is going through its first revenue and earnings recession in seven years, a bad omen for the broader economy.
“The only way to keep earnings from falling off the cliff in this environment is for companies to dive head-first into cost cutting,” writes financial blogger Wolf Richter on his Wolf Street website
. “Many have already started that process. Their announcements, including layoffs, are hitting the headlines on a daily basis.”
He cites FactSet data that show revenues have fallen 3.5 percent from a year earlier among the S&P 500 companies that have reported fourth quarter results.
“Revenue declines are stretching across four quarters in a row, a feat that has been accomplished for the last time during the depth of the financial crisis,” Richter writes.
The global economy in 2008 suffered its steepest decline since the Great Depression as the housing bubble deflated and investment bank Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history. Unemployment climbed
to a 26-year high of 10 percent and the Federal Reserve responded by cutting interest rates
to a record low near zero percent.
Part of this year’s sales and profit recession can be attributed to the energy industry, which is suffering from a nearly 70 percent collapse in oil prices since mid-2014. Excluding drillers, earnings for S&P 500 companies grew “a measly 0.9 percent,” Richter says.
He says profits would be much worse if the health care industry, which makes up nearly one-fifth of the U.S. economy, were excluded.
“Runaway health-care expenses that consumers and companies have been complaining about for decades are revenues to the industry,” Richter says. “Much of it shows up in ‘consumer spending.’ Given the powerful lobbying by the industry and the absurd dollars involved, no one is going to do anything about the industry’s monopolistic or oligopolistic structures.”
Looking ahead, Wall Street strategists on average estimate S&P 500 earnings will grow by 5 percent in 2016 and 13 percent the following year.
“But reality is now. And now revenues and earnings are declining,” Richter writes.
Data today showed that U.S. factory activity appeared to stabilize in January, but a recovery is unlikely in the near term as exporters grapple with a strong dollar and lower oil prices force energy firms to cut spending, Reuters reports
The Institute for Supply Management said its index of national factory activity increased 0.2 percentage point to a reading of 48.2 last month, the fourth straight month of contraction. A reading below 50 indicates a contraction in manufacturing. However, the index remains above the 43.1 threshold which is associated with a recession, Reuters says.
Manufacturing makes up 12 percent of the economy.
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