The economy may have grown at an annual rate of 2.4% in the third quarter, but the long-awaited recovery in corporate profits was nowhere in sight.

Despite forecasts that earnings would begin to snap back in the second half of 1991, third-quarter profits slipped 22% compared with last year's quarter. The decline was nearly as large as the hefty 23% drop in second-quarter earnings. Sales for the 900 companies in BUSINESS WEEK's Corporate Scoreboard remained even with year-ago levels, according to Standard & Poor's Compustat Services Inc. For the first nine months of 1990, earnings declined 17%, while sales inched ahead 2%.

This third quarter marks a doleful second anniversary: The slide in corporate profits began in the third quarter of 1989, a year before the recession officially started. Lackluster consumer demand and intense competition from both domestic and foreign producers were taking their toll on corporate profits even before the economic downturn began in earnest. Although gross national product was expanding in the third quarter of this year, companies were still suffering a squeeze on profit margins. Net margins withered to 3.4% in the quarter, from 4.4% a year earlier, and to 3.8% for the first nine months of 1991, from 4.7%.

The pressure on margins is likely to continue, regardless of whether the economy slips back into recession. "There isn't much difference between sluggish growth and recession when it comes to corporate profits," says Mark Zandi, managing director of Regional Financial Associates, an economic consulting firm in West Chester, Pa. "Companies are still feeling the pain." SILENT SHOPPERS. Earlier this year, many economists were anticipating a rebound in corporate earnings by the fourth quarter of 1991 at the latest. But most forecasts are now calling for profits to pick up steam next year. That's because many companies are taking advantage of the weak economy to restructure their operations and clean up their balance sheets. Without these write-offs, third-quarter profits declined 10.7%, according to Zacks Investment Research. "Cost-cutting is causing a lot of pain, but it's setting the stage for higher margins when the recovery takes hold," says Stephen S. Roach, senior economist at Morgan Stanley & Co.

Those greater operating efficiencies could well be the only thing propelling an improvement of corporate profits next year, because consumer demand isn't likely to add much spark. With high levels of debt and fears of unemployment continuing to shadow households, Roach and many other economists aren't expecting consumers to go on a spending binge even when the economy gets back on track.

Against that backdrop, the recovery in corporate earnings is likely to be muted. Zandi expects profits to grow 18% on a year-over-year basis from the fourth quarter of 1991 until the fourth quarter of 1992. This would represent the weakest rebound in corporate earnings since World War II, says Zandi. During the postwar period, he says, the average gain in profits in the year following the end of a recession has been 43%.

Similarly, Susan Lakatos, a vice-president at Kidder Peabody & Co., expects profits for companies in the Standard & Poor's 500-stock index to climb by 17% in 1992. And she doesn't think looser monetary policy can do much to brighten the picture this year if corporations continue to lay off workers and take write-offs in the fourth quarter. "The service economy is in the midst of a major restructuring," says Lakatos. "This reduces the stimulative effect of interest-rate cuts. We're getting less bang for the buck out of the Fed."

Among the companies taking massive write-offs in the third quarter was AT&T, whose $1.8 billion loss was the largest of any company. AT&T took $4 billion in charges to cover the costs of its recent merger with computer maker NCR and to reorganize its phone-equipment operations. Without the special charges, AT&T would have earned $848 million in the quarter. Westinghouse Electric reported a $1.48 billion loss -- second only to AT&T's -- after setting aside $1.7 billion to dispose of assets in its financial-services unit and taking a $160 million charge to eliminate jobs. General Motors had the third-largest loss, $ 1.06 billion, as a much-hoped-for rebound in auto sales failed to materialize, despite new models from both GM and Ford.

The companies earning the most in the quarter were tobacco-and-food giant Philip Morris, with $1.13 billion in profits; Exxon, with $1.11 billion; and General Electric, with $1.04 billion.

SLOW VEHICLES. A mixed bag of leisure-group companies was the sector logging the sharpest earnings gain, up 682% in the quarter. The group was buoyed by improved performance at photography giant Polaroid. Its third-quarter net income of $582 million includes a $925 million pretax gain from a lawsuit settlement with Eastman Kodak. Other groups showing big gains in the third quarter were utilities involved in gas and oil transmission, up 616%; trucking and shipping, ahead 162%; and business machines and services, up 69%.

The industry sector that reported the largest decline was the car and truck group, which posted a $1.73 billion loss. All Big Three auto makers remained in the red during the third quarter, as weak consumer confidence led to a 12.5% decline in sales of cars and light trucks. However, auto executives remain hopeful that pent-up consumer demand will soon lead to rising sales. "We think the market is about to turn," says Lee A. Iacocca, chairman of Chrysler Corp.Telecommunications equipment and services posted the second-largest loss of any sector, $1.5 billion, thanks to the restructuring charges at AT&T. Similarly, the electrical products group was pulled into the red to the tune of $1.3 billion by Westinghouse's loss. Other groups that were awash in red ink during the third quarter included broadcasting, steel, and West and Southwest banks, hit by bad real estate loans.

Even when the economy starts chugging along -- as many analysts believe it will by next fall's Presidential election -- the impact on corporate earnings will be restrained. Companies will still need time to wring out the excesses of the 1980s. Financial-services companies will not digest their bad real estate loans quickly, and the service sector will not bring its overhead into line with revenues overnight. As a result, when the rebound in corporate earnings finally does arrive some time next year, instead of yelps of joy, you'll probably hear only a muted sigh of relief in boardrooms across the country.

         Percent change from
      GAS, OIL & TRANSMISSION     616
      TRUCKING & SHIPPING         162
      FOOD PROCESSING              68
      TOBACCO                      47
      FOOD RETAILING               47
      HOTEL & MOTEL                33
      HEALTH CARE SERVICES         26
      PETROLEUM SERVICES           24
      GLASS CONTAINERS             24
      DRUGS & RESEARCH             21
      INSURANCE                    19
      CONSTRUCTION & ENG.          18
      MEDICAL PRODUCTS             18
      ALL-INDUSTRY AVERAGE:       -22%
         Percent change from
      CARS & TRUCKS                LOSS
      BROADCASTING                 LOSS
      STEEL                        LOSS
      RAILROADS                     -90
      MACHINE & HAND TOOLS           -88
      CONGLOMERATES                  -80
      SEMICONDUCTORS                 -70
      COMPUTERS & PERIPHERALS        -66
      ALUMINUM                       -60
      OTHER METALS                   -55
      FOREST PRODUCTS                -53
      SPECIAL MACHINERY              -51
         of dollars
      PHILIP MORRIS               $1,131
      EXXON                        1,115
      GENERAL ELECTRIC             1,042
      POLAROID                       582
      BRISTOL-MYERS SQUIBB           563
      MERCK                          552
      PROCTER & GAMBLE               536
      DU PONT                        504
      GTE                            462
      COCA-COLA                      456
      BOEING                         401
      SOUTHERN                       399
      AMERICAN HOME PRODUCTS         385
      BELL ATLANTIC                  383
      AMERITECH                      379
         of dollars
      AT&T                        $1,799
      WESTINGHOUSE ELECTRIC        1,482
      GENERAL MOTORS               1,057
      CITICORP                       885
      TEXAS UTILITIES                735
      TENNECO                        643
      FORD MOTOR                     574
      ALLIED-SIGNAL                  540
      SECURITY PACIFIC               509
      UNION PACIFIC                  406
      TUCSON ELECTRIC POWER          366
      CONTINENTAL BANK               185
      CBS                            169
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