2001-02 Deja Vu

Morris Segall      2009 economy, business landscape, crisis, debt

The news this week from corporate America regarding job cuts and declining earnings is so bad that it marks a new unfortunate chapter in the current U.S. recession. The fourth quarter earnings annoucements being released this week reveal a rapid collapse in U.S. corporate earnings that rival the earnings implosion of U.S. companies in 2001-02. The U.S. recession has now hit corporate America hard and there is no sector of American business that is not feeling the impact of the current zero demand environment.

We expect a 4th quarter earnings decline for the S&P 500 Index to exceed the 22% year over year decline in last year’s third quarter. At this point, the magnitude of U.S. corporate earnings declines is now an active contributor to the recession rather than collateral damage from the recession. The continuation (six consecutive quarters) and deepening severity of corporate earnings declines are making the U.S. recession more severe by leading to further job cuts, reduction in pay for existing workers, weakening corporate balance sheets and credit quality. With further earnings weakness, the corporate sector is a major incremental negative for the economy in 2009 which will prolong the current recession. The decline in U.S. corporate earnings are being replicated by massive earnings declines in companies in Western Europe and Japan which will intensify recessions in those regions.