Profits: They Aren't As Good As They Look

Earnings have jumped since late last year, but that's due to cost-cutting, not growth

At first blush, the last three months of 2002 were kind to much of Corporate America. Despite weak business conditions and a stalling economy, profits for the 85 companies in BusinessWeek's flash report were up 37%. Take out special charges, and income from continuing operations was up 35%, compared with the previous year.

But hold the hurrahs--there's less to these numbers than meets the eye. First, consider the context: Profits are so far up largely because they are being compared with results in the final quarter of 2001, when earnings declined 56% over the previous year in the wake of September 11 and the slowing economy.

There's an even better reason not to get too excited: Much of the uptick in profits was the result of cost-cutting. With sales up a much lower 7%--the best performance in several quarters--most companies are wringing out profits by cutting costs. Throughout the economy, they're shedding jobs, controlling capital spending, and keeping inventories lean. Indeed, the ax is falling across the board, from tech and retail to consumer goods and hospitality.

Of course, some sectors prospered the old-fashioned way: by selling more goods and services or raising prices. They include energy, health-care, and auto companies. But for most of Corporate America, cutting costs was the leading route to profitability--and one that's not likely to change anytime soon.

By Pallavi Gogoi, with Robert Berner in Chicago

— With assistance by Robert Berner

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