Shutdown effect could be seen in earnings
As companies begin reporting earnings for the third quarter, investors should start gleaning from chief executives' comments whether political antics over the nation's debt ceiling and budget will actually interfere with company profits in the weeks ahead.
Since the government's partial shutdown began, analysts have expected only a minor impact from the debt squabble. They have considered the shutdown a temporary drag on consumer confidence as individuals have waited for politicians to get their act together.
The paralysis has disrupted some business activities that depend on government approvals and payments. Yet, the drama generally has been considered an aggravation and embarrassment for the United States on the global stage, rather than a serious long-term impediment to business activity.
Craig Alexander, economist for TD Economics, noted that if resolved quickly, the shutdown could provide a burst of spending when it ends and that government employees get paid for time away from their jobs. He noted that after the 28-day shutdown in late 1995 and early 1996, output gained 7.2 percent the next quarter — probably a result of people with money to spend again after a lean period.
As earnings reports are delivered, executives are expected to be focused far less on politics than on whether companies see sales improving in Europe and emerging markets, especially China.
Many of the largest companies depend on foreign markets for almost half of their sales. And analysts are predicting that corporate leaders will provide reports during the next few weeks that confirm that Europe is pulling out of its recession and that China's growth isn't slowing at the alarming pace feared earlier this year. As world trade stalled during the past few months, analysts lowered expectations considerably for earnings among energy stocks, basic materials and technology for the third quarter. Earnings for the Standard & Poor's 500 are expected to grow 3 percent.
China has been the dominant buyer of many materials ranging from iron ore to copper and nickel, so its slowdown, along with other emerging markets, has been a particular drag on commodity companies. But FactSet analyst John Butters notes that since the beginning of the third quarter, analysts have cut expectations for growth in all 10 sectors of the economy — from financial companies to consumer companies such as Safeway, Avon Products and Amazon.com.
Nike recently reported revenue higher in all geographic areas except China, and said Europe led the way with growth acceleration, Butters noted. Yet companies ranging from Darden Restaurants to Conagra and FedEx “have talked about cost-cutting,” he said.
“Keep an eye on that,” said Butters. “Analysts have fairly lofty expectations for growth during the next several quarters.” The consensus for the next quarter is a lofty 10 percent gain in earnings.
Yet the International Monetary Fund on Tuesday lowered growth expectations for the global economy to 2.9 percent for this year and 3.6 percent for next year, and ratcheted back expectations for a broad range of countries — everywhere from the United States to China, Mexico, Brazil and India.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. Readers may send her email at email@example.com.