Economic Slowing Apparent in Corporate America

Thursday, December 14, 2000

By Steve James

NEW YORK (Reuters) - Mounting job cuts at major U.S. companies and a flurry of recent warnings of weaker profits and sales points to a dramatic slowdown, if not an end, to America's unprecedented decade of economic prosperity, Wall Street experts said on Thursday.

While few economists see a recession in the near future, some are growing less confident the Federal Reserve can engineer the economic "soft landing" it had in mind when it began raising interest rates last year to slow growth and ward off inflationary pressures.

After the close of regular trading on Thursday, Microsoft Corp. became the latest corporate giant to warn of reduced earnings and slower sales, citing a global economic slowdown. Microsoft lowered its fiscal second-quarter earnings and revenue forecast by 5 percent to 6 percent.

"I don't think the economy will turn to bust, but it will definitely slow," said William Dudley, chief U.S. economist at Goldman Sachs.

Evidence suggests consumers are not buying the big-ticket items like cars, household appliances and personal computers that kept the economy zinging for much of the Clinton years.

Just this week, automaker General Motors Corp. said it will miss its profit forecasts and cut nearly 4 percent of its worldwide workforce, while appliance maker Whirlpool Corp. also warned earnings will fall short and said it will cut as many as 6,000 jobs, or 10 percent of its workforce.

On Thursday, Whirlpool rival Maytag Corp. said lower-than-expected sales would cause it to miss fourth-quarter earnings estimates, and New York banks Chase Manhattan Corp. and J.P. Morgan & Co. Inc. said their earnings would fall substantially below Wall Street estimates and that their expected merger would result in 5,000 job cuts.

JOB CUTS RISE IN NOVEMBER

The number of corporate job cuts in America is rising by the month. For November, U.S. companies announced 44,152 job cuts, up 0.8 percent from October's 43,799, the international outplacement firm Challenger, Gray & Christmas said in its latest report.

It was the fifth straight month of more than 40,000 job cuts and the seventh this year. The most job cuts in November came in the battered Internet sector, which laid off 8,329 people. The auto industry followed with 8,306 job cuts.

"Consumer confidence has slipped and economic growth in the third quarter slowed to a pace not seen in four years," said John Challenger, the company's chief executive. "These are significant signs for companies as they finalize plans for the new year."

Other data signal a slowing of the economy as consumers spend less. On Thursday, United Parcel Service said its domestic volume during the first two weeks of the peak Christmas shipping season had been flat compared with last year. UPS said it still expects to meet 2000 and 2001 targets.

As sales drop, inventories are rising and forcing manufacturers to rethink their investment spending plans. This year, manufacturers raised capital expenditures by only 4.9 percent over 1999 and 2001 promises to be no better, with the National Association of Purchasing Management forecasting only a 1.8 percent rise in capital expenditures.

CORPORATE EARNINGS GROWTH SLOWS

Chuck Hill, director of research for First Call/Thomson Financial, which tracks corporate earnings forecasts, said the number of companies "pre-announcing" earnings warnings was up around 60 percent compared with last year.

In addition, earnings growth is slowing. The combined earnings estimate for the S&P500 companies had fallen in half to 7.8 percent on Thursday, down from 15.6 percent growth on Oct. 1, Hill told Reuters.

"We are in a classic downturn for the economy but I don't think we will see the bottom of earnings growth until the second quarter of next year," he said.

"This quarter, estimates are in a free-fall and pre-announcements generate reductions in estimates," said Hill.

U.S. Commerce Department figures this week also showed a slowdown. Profits of U.S. manufacturing companies averaged a seasonally adjusted 6.4 cents per dollar of sales after taxes in the third quarter -- down from 6.6 cents per dollar of sales in the second quarter.

The decline in third-quarter profits this year occurred as overall economic growth, measured by Gross Domestic Product (GDP), slowed sharply to an annual rate of 2.7 percent from 5.6 percent in the second quarter.

PROFIT WARNINGS COME ACROSS NATION

The pattern of corporate profit shortfalls is apparent across the United States, where the vibrant economy was an integral part of the presidential campaign that just ended, with George W. Bush emerging as president-elect over Vice President Al Gore.

In the Midwest, Modine Manufacturing Co. warned of a weak third quarter and Ingersoll-Rand said 2000 earnings would come in on the low end of the range of analyst estimates. Similarly, the world's largest auto supplier, Delphi Automotive Systems Corp., has warned of a weak fourth quarter and said it will lay off 1,700 employees.

Among other companies announcing job cuts since November, Unisys Corp. said it will cut 2,000 jobs, Dun & Bradstreet Corp. slashed 1,000 jobs, Guilford Mills Inc. eliminated 550 workers and Marchfirst cut about 1,000 jobs.

High-tech Silicon Valley, whose brain power and investment capital helped fuel the turbo-charged growth of the New Economy, has not been immune either.

The Emeryville, Calif., search engine and Internet company Ask Jeeves Inc. said on Tuesday it would cut 25 percent of its workforce, or about 180 full-time positions. The cutbacks at Ask Jeeves followed an earnings warning last week, continuing the dot-com shakeout that has been roiling the New Economy.

On Wednesday, Chase Hambrecht & Quist said Dell Computer Corp., the world's No. 2 personal computer maker, may be the next to issue a warning on its fourth-quarter results.

HARDER LANDING THAN PREVIOUSLY FORECAST

Chase Hambrecht analyst Walter Winnitzki said the market may have already discounted an earnings miss into Dell's stock after warnings of lower results from Compaq Computer Corp., Gateway Inc., Intel Corp., Advanced Micro Devices Inc. and Apple Computer Inc.

First Call's Hill said after two quarters of 42 percent growth in earnings in the technology sector, analysts had expected growth to slow to 29 percent in the fourth, but did not foresee the coming plunge of the growth rate into single digits.

"There were no alarm bells on Oct. 1, but the techs went into a freefall and the estimate now is for 9 percent growth in the sector," Hill said.

Asked if this was a signal the economy was slowing, Hill said: "We are heading for something less than a soft landing. Earnings will be between a soft landing and a hard landing, possibly a hard landing.

The mounting job cuts and flurry of profit warnings has not led some economists to change their enthusiasm for the economy.

"It is a dangerous time to be calling for an end to what still appears to be an extraordinarily resilient expansion," said Diane Swonk, chief economist for Bank One Corp. "As long as consumers continue to spend ... then inventories which dampened growth in mid-2000 will liquidate."

http://news.lycos.com/headlines/TopNews/article.asp?docid=RTNEWS-ECONOMY-DECLINE-DC&date=20001214

-- Martin Thompson (mthom1927@aol.com), December 14, 2000