That Sinking Feeling Hits Business Again

The recession arrived in full force during the fourth quarter of 1990, as fear of war in the Middle East and rising fuel prices put the spending plans of many consumers and companies on ice. The chill in demand sent the earnings of the 900 companies in BUSINESS WEEK's Corporate Scoreboard down 12% from the 1989 fourth quarter. And profits slipped 7% for the year, just as they did in 1989.

Despite weak demand, revenues grew 10% in the quarter. But some of this increase can be attributed to rising fuel prices. Without the oil and gas companies, sales rose only 6.8%. For the year, revenues were up 8% for all companies, down slightly from 10% in 1989.

If higher energy bills and the threat of war weren't enough to spook normally free-spending Americans, the fear of unemployment was. During the second half of 1990, companies trimmed payrolls and kept inventories lean in anticipation of a recession. This strategy may have frightened consumers, but it also set the stage for a rebound in profits later this year. "Companies laid off workers at the first sign of economic weakness," says Mark M. Zandi of Regional Financial Associates Inc. in West Chester, Pa. "But that's laying the foundation for profits to jump quickly because of reduced overhead and costs."

VICTORY SPENDING. Economists remain divided about whether the U. S. was in a recession before Iraq invaded Kuwait last August. But many agree that the victorious end to the war could lead to a surge of consumer confidence and stronger demand for autos and other goods. Kurt Karl, senior economist at WEFA Group Inc., is projecting a 10% increase in 1991 corporate profits. "The price of oil is down substantially, so that's money into the pockets of everyone who buys gasoline," says Karl. At the same time, profits should benefit from lower interest rates and the Federal Reserve Board's easing of money supply.

While most corporations saw Saddam Hussein as the grinch who stole Christmas, the gulf crisis was a windfall for energy producers. In the fourth quarter, earnings of oil and gas companies rose 195%. Without the massive profits from the energy companies, that 12% earnings decline for the BUSINESS WEEK Scoreboard would have been 19.9%.

Energy wasn't the only sector that came through the fourth quarter in good stead. Computer sales held up better than expected, giving a lift to IBM. Big Blue's profits jumped 316% from the 1989 quarter, when it took a $1.5 billion aftertax charge to consolidate operations and eliminate 10,000 jobs.

IBM earned $6.02 billion in 1990, recapturing the No. 1 position in BUSINESS WEEK's ranking of the Top 25 profit leaders. IBM headed the list in 1988, but it was ousted in 1989 by General Motors Corp. GM didn't even make the Top 25 in 1990 because it lost nearly $2 billion. Not surprisingly, the energy companies were well represented among BUSINESS WEEK's Top 25 earnings leaders. Exxon Corp.'s 1990 profits of $5.01 billion vaulted it to No. 2 on the list. Chevron, Mobil, and Amoco all made the top 10 in 1990, though none of them held that distinction in the previous year. By jumping from fifth to second place, Exxon's earnings surpassed those of General Electric Co., which ranked third. Philip Morris Cos. came in fourth, followed by American Telephone & Telegraph Co.

In terms of sales, GM was still king of the hill in 1990. But Exxon moved ahead of Ford Motor Co. to take the No. 2 position. IBM and Mobil were Nos. 4 and 5, the same as in the previous year.

For the oil companies, the fourth quarter was the best of times. But for the automotive sector, it was the worst. Consumers were in no mood to make big purchases with the threat of war and a possible energy shortage, not to mention the gloomy state of the economy. The cars-and-trucks group reported a loss of more than $1 billion for the year. Chrysler Corp. was the only one of the Big Three auto makers to show a profit in the fourth quarter. Ford lost $518.5 million in the quarter but earned $860 million for the year.

FOREIGN EARNINGS. Although the U. S., Britain, and other English-speaking countries were mired in recession during the fourth quarter, economic growth continued in other parts of the world. As a result, some U. S. companies with large export or foreign operations showed good profit gains, with a little help from the weak dollar. "American companies were saved by net exports in the fourth quarter," says Jason Benderly, president of Benderly Economic Associates of Vail, Colo.

Eastman Kodak Co. was a case in point. Thanks to moderate sales increases outside the U. S. and gains from converting strong foreign currencies into dollars, Kodak reported net income of $326 million in the fourth quarter. That compared with a $60 million loss in the 1989 quarter, when Kodak took a $525 million charge to cover restructuring costs.

Kodak was one of dozens of companies that took large write-offs during the fourth quarter of 1989, which is one reason why the latest quarter didn't look so bad in comparison. Susan C. Lakatos, a vice-president at Kidder, Peabody & Co., estimates that write-offs by companies in the Standard & Poor's 500-stock index totaled $1.22 a share in the fourth quarter of 1989. By contrast, write-offs and provisions against bank loan losses accounted for 75~ a share in the latest quarter.

In some ways, the strength of energy companies in the 1990 fourth quarter was an aberration. For the year, the group that had the biggest percentage increase in profits was health care, with a 61% gain. Next were tobacco, with a 49% increase; aerospace, with 41%; entertainment, with 39%; and drugs and research, with 36%.

The real estate group had the largest percentage decline in earnings during 1990, with a 77% decrease. Other groups that fared poorly for the year include the tire and rubber group, which had a 67% drop in earnings; auto parts, with a 61% decline; aluminum, with a 51% drop; and appliances, with a 49% decrease. Industries that recorded a loss for the year include textiles, steel, savings and loans, airlines, and cars and trucks.

As spring approaches, many economists are predicting that the freeze in consumer and corporate spending will begin to thaw. With interest rates down, inventories and payrolls lean, and the dollar competitive, corporate profits should bounce back in the second half of the year, says Stephen S. Roach, senior economist at Morgan Stanley & Co. Roach still thinks earnings will be down for the year but that they will turn upward sharply in 1992. That would be welcome news for companies battered by two consecutive years of disappointing profits.

                             1990 sales   Percent change   1989
                      Millions of dollars from 1989        rank
       1 GENERAL MOTORS        $124,705        -2 %          1
       2 EXXON                  107,197        22            3
       3 FORD MOTOR              97,650         2            2
       4 IBM                     69,018        10            4
       5 MOBIL                   64,244        14            5
       6 GENERAL ELECTRIC        58,414         7            6
       7 SEARS, ROEBUCK          55,972         4            7
       8 PHILIP MORRIS           46,226        16            8
       9 CHEVRON                 42,600        30           16
      10 TEXACO                  41,822        17           14
      11 DU PONT                 40,047        13           12
      12 CITICORP                38,385         1            9
      13 AT&T                    37,285         3           11
      14 WAL-MART STORES*        32,602        26           17
      15 K MART                  32,448        14           15
      16 CHRYSLER                30,620       -13           13
      17 AMOCO                   28,012        17           19
      18 BOEING                  27,595        36           22
      19 PROCTER & GAMBLE        25,848        14           20
      20 AMERICAN EXPRESS        24,332        -3           18
      21 AMERICAN STORES*        22,156         1           21
      22 UNITED TECHNOLOGIES     21,783        10           25
      23 OCCIDENTAL PETROLEUM    21,694         8           24
      24 ITT                     20,691         3           23
      25 USX                     20,659        10           28
      * Fiscal year ended January or February, 1991
                                     1990 profits   Percent change   1989
                               Millions of dollars     from 1989     rank
       1 IBM                             $6,020          60 %         4
       2 EXXON                           5,010           68           5
       3 GENERAL ELECTRIC                4,303            9           2
       4 PHILIP MORRIS                   3,540           20           6
       5 AT&T                            2,735            1           7
       6 DU PONT                         2,310           -7           9
       7 CHEVRON                         2,157          759         201
       8 MOBIL                           1,928            7          12
       9 AMOCO                           1,913           19          14
      10 MERCK                           1,781           19          15
      11 BRISTOL-MYERS SQUIBB            1,748          134          51
      12 PROCTER & GAMBLE                1,733           24          18
      13 ATLANTIC RICHFIELD              1,688          -14          11
      14 BELLSOUTH                       1,632           -4          13
      15 GTE                             1,541            9          17
      16 TEXACO                          1,450          -40          10
      17 AMERICAN INTL. GROUP            1,442            5          19
      18 BOEING                          1,385          105          62
      19 DOW CHEMICAL                    1,384          -44           8
      20 COCA-COLA                       1,382           16          23
      21 BELL ATLANTIC                   1,313           22          30
      22 3M                              1,308            5          20
      23 WAL-MART STORES*                1,291           20          29
      24 JOHNSON & JOHNSON               1,268           17          28
      25 AMERITECH                       1,254            1          22
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