Corporate America is back in the passing lane. Earnings of the 900 companies on BUSINESS WEEK's Corporate Scoreboard zoomed ahead by a remarkable 37% in the fourth quarter and by 19% for the entire year. The 1999 earnings gain for the Scoreboard companies was the largest jump since 1994 and easily bested 1998's slowpoke 2% rise when the economic downturn overseas put the brakes on U.S. profits.
Why the earnings pickup? Technology, capital investments, and a rise in productivity all helped. Unemployment hit a 30-year low, and, by most measures, inflation was still a no-show. Meanwhile, as the U.S. economy cruised along, economies around the globe perked up. Another big push came from consumers, who converted real wage gains and stock-market profits into a 7% spending increase for the year, up from a 6% gain in 1998.
Of course, some sectors still struggled. Energy prices tripled, dragging back airlines such as AMR Corp., whose '99 earnings dropped 41%, to $656 million, and chemical makers such as DuPont Co., whose profits plummeted 87% last year, to $219 million. The Federal Reserve has jacked up short-term rates by a full percentage point since last summer. That will put the squeeze on banks and capital-intensive industries. Labor costs are rising at employers such as McDonald's Corp. And the computer sector suffered a fourth-quarter slowdown as companies and individuals put off purchases until after Y2K.
Overall, though, companies are in high gear. "This boom in corporate earnings has been the longest, the strongest, the most persistent in corporate history," says Bruce Steinberg, chief economist with Merrill Lynch & Co. "That tells you something has changed." That something is the U.S. economy, now a marvel of consistency. Adjusted for inflation, the fourth-quarter gross domestic product grew by 5.8%, which helped the economy post a 4% increase for the year, according to the government's estimate. That's down from 4.3% in 1998 but is still strong for an economic expansion now entering its 10th year.
GE'S BIG YEAR. Much of that growth was fueled by brisk spending for computers and other technology, so it's no surprise that three of the top 10 most profitable companies last year were tech titans. Software giant Microsoft Corp. pushed earnings up 38% for the year, to $8.7 billion. A rebound in Asia helped. And Microsoft reaped $773 million on its investments, double from last year, thanks to big stakes in telecommunications and Internet stocks. IBM slowed in the fourth quarter, when earnings fell 11%, but the computer giant's '99 tally still climbed 22%, to $7.7 billion. Similarly, Intel Corp. saw fourth-quarter profits climb only 2%, but for the year earnings jumped 21%, to $7.3 billion. With Y2K fears no longer depressing sales, the computer sector is expected to post double-digit earnings gains in 2000.
Profit winner General Electric Corp. scored big by selling services along with its equipment. GE posted a 15% increase last year, to $10.7 billion, making it the first corporation ever to earn more than $10 billion without a one-time gain. CEO John F. Welch Jr. credits much of the rise to the company's capital-services unit, where operating earnings rose 17% last year, to $4.44 billion. With total back orders at a record $32 billion, Welch promises higher profits this year.
Wall Street's record-breaking year buoyed the financial sector. Citigroup began to reap the benefits from its 1998 merger of Citicorp and Travelers Group. Profits climbed 72% at the financial-services conglomerate last year, to nearly $10.0 billion, making it second only to GE. Co-chairman and co-CEO Sanford I. Weill says the strong showing is proof the merger is working. "We're in more countries than any financial-services company, and our product line is more diverse." For its part, Bank of America Corp. pocketed $7.9 billion last year, a 53% gain. Even Bank One Corp., hurt by a big fourth-quarter charge because of credit-card problems, managed to lift annual profits 12%, to $3.5 billion.
The continued strength in the stock market helped keep consumer confidence strong. Nowhere was that more evident than on the highways, as U.S. sales of cars and light trucks hit a record 16.9 million units. Truck sales, with their fatter margins, were especially strong sellers. Ford Motor Co. hit the jackpot, with sales rising 13% last year, to $162.6 billion. Earnings weighed in at $7.2 billion, a 67% drop from '98, when profits got a $16 billion one-time boost from the spin-off of Ford's Associates First Capital financing unit.
Still, some companies are having trouble adjusting to the New Economy. Allstate Corp., the bellwether insurance company, was stung by direct marketer Geico Corp. as well as some online insurance startups. Allstate's '99 earnings slid 17%, to $2.72 billion for the year. Some companies lost out for their own peculiar reasons. Bled by an aftertax charge of $3.29 billion to settle lawsuits over its diet drugs Redux and Pondimin, pharmaceutical and consumer-products giant American Home Products Corp. lost $1.23 billion in 1999.
But overall, the millennium ended on a high note for Corporate America. While rising energy and labor costs may be worrying the Federal Reserve, surging productivity gains and free-spending consumers seem to be enough to swell corporate profits. "Employment trumps interest rates any day of the week for consumer spending," says Rosanne Cahn, chief economist at Credit Suisse First Boston. Companies may have to pay a little more to refuel in 2000, but the earnings freeway still looks wide open ahead.