Could there be anything worse for corporate profits than the present anemic U.S. economy? Sure there could. How about an accelerating worldwide slowdown at the same time? That, say many economists, is what we have. And it could get worse.
The fallout from weak economies abroad is already hurting some U.S. companies. Sales have fallen in many foreign markets, while the consistently strong U.S. dollar translates into lower earnings from overseas operations. Moreover, the U.S. is the engine that drives the world economy. U.S. imports typically account for 22% of world trade. So even a tiny decrease in growth means the U.S. can't buy as much from abroad, leaving foreigners with fewer dollars to pay for U.S. goods. Says David A. Wyss, chief economist at Standard & Poor's: "Domestic earnings have plunged, and foreign earnings will drop more sharply."
PESSIMISM. No one expects the largest foreign economies to regain strength before 2002 at the earliest. Only three months ago, economists projected that Europe's gross domestic product in the second half would grow at a 2.5% annual rate. Few are that optimistic anymore. Carl B. Weinberg, chief economist at High Frequency Economics Ltd., now believes that the impact of stagnant wages, along with food and energy price shocks, will lower second-half growth to less than 1.5%. In recession-mired Japan, it's not at all clear that Prime Minister Junichiro Koizumi will ever be able to implement badly needed economic reforms. And the biggest South American economies? Forget it. Brazil is suffering from an energy crunch, while Argentina's huge government debt and ballooning interest payments could prolong its three-year-old recession. Stephen S. Roach, Morgan Stanley Dean Witter & Co.'s chief economist, doesn't see things getting better anytime soon. "The world is decelerating over the course of the year," he says. Roach estimates that world GDP growth of 3.5% in the first half could slide as low as 2.0% in the second.
Business is already affected. Ford Motor Co. posted second-quarter losses in South America. In the Ford region that includes Asia, profits fell 65% year-to-year, to $47 million. Henry D.G. Wallace, vice-president for Ford Asia-Pacific, now sees no near-term recovery in the slumping economies of Asia and South America. Paper-products giant Kimberly-Clark Corp. (KMB ) says weakness in British, Brazilian, and South Korean currencies cost it $40 million in the quarter. McDonald's Corp. (MCD ), already hammered in Europe by the mad-cow scare, says currency translation cost it $24 million in Turkey alone.
Over the next year, most U.S. companies will likely get their main profit boost at home. But if the global economy keeps heading south, even a robust domestic recovery may not fully restore earnings growth.
By James Mehring in New York