Companies are Doing Well, Even if Economy is Not

Companies slashed costs during the recession, laying off workers and reining in spending on plants and equipment, which boosted profit margins.

Major companies are packing away record profits even as the economy falters, unemployment remains high and the debt-ceiling crisis has shaken confidence in the country, analysts said.

In July, corporate giants such as 3M, Caterpillar, Goodyear, Microsoft and Apple reported all-time high revenues in the second quarter of 2011, though the stock market still slumped amid fears of an economic slowdown and a possible government default.

Of the companies in the S&P 500 list of large-cap firms which have reported their quarterly earnings to date, 72% have beaten analysts' forecasts, according to Standard & Poor's analyst Howard Silverblatt.

Moreover, if the current trend keeps up, the S&P 500 companies are poised to have their most profitable quarter ever, he said.

"Earnings are basically the only thing holding up the market at this point," Silverblatt said. "They're amazing numbers."

The prosperity of large corporations may seem surprising at a time when many indicators show profound weakness in the world's largest economy. The unemployment rate stands at 9.2%, and the government last week said growth in the second quarter was a feeble 1.3%, far below economists' expectations.

But analysts say corporations are doing well in part because they slashed costs during the recession, laying off workers and reining in spending on plants and equipment, which boosted profit margins. "They got lean and mean," said Marc Pado, U.S. market strategist for Cantor Fitzgerald.

"Corporate America is very strong. They were preparing for a downward turn. Everybody was talking about a double-dip recession and they were bracing for that. They were holding on to cash, not hiring new workers and voiding themselves of inventory."

The total cash held by U.S. non-financial corporations surged to $1.2 trillion at the end of 2010, up 11.2% from a year earlier, Moody's Investors Service said in a report last week. One reason that companies are holding so much cash -- and not spending it on investments or hiring new workers -- is that they are worried about the shaky economic situation in the United States and Europe. "Management teams remember the rapid shutdown of the financial markets in 2008 and prefer to hold large cash balances even though the money is earning a low return," Moody's said.

Another notable result from the latest round of earnings reports is that many companies are showing their best results in fast-growing markets such as Asia and Latin America rather than at home. General Electric, Caterpillar and Dow Chemical were among the corporate stalwarts which reported strong emerging market sales that helped offset slow growth in the United States in the second quarter.

"Dow's broad geographic reach and leadership in many attractive, high-growth end-markets firmly position us to benefit from the megatrends that are defining our future," Dow Chemical chief executive Andrew Liveris said last week as the company announced a 73.4% rise in quarterly profits.

With the weakness of the dollar, which makes American exports cheaper for consumers around the world, that trend is only likely to accelerate in the future, analysts say.

"The big growth is happening outside the U.S., not inside the U.S., and you've seen a lot of companies increase their export sales as a percentage of the total," said Cantor's Pado.

Copyright Agence France-Presse, 2011

TAGS: The Economy
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