A Foreign Engine For U.S. Profits

The U.S. economy will probably start slowing this year, but the profit picture for many companies remains healthy. For that, they can thank robust growth overseas. The International Monetary Fund expects the U.S. and other world economies to grow by 4.6% this year. But in 2005, U.S. real gross domestic product growth will slip to 3.9%, while world output, at 4.4%, should remain steady.

As a result, says Richard D. Rippe, chief economist at Prudential Securities (PRU ), profits from Corporate America's overseas-based operations should rise next year by 10% to 15%, or by $30 billion to $45 billion. And after adding gains from U.S. exporters, the earnings promise to be even greater.

So far, the global upturn is being fueled by a revival in capital investment, which plays to the strengths of the U.S. "More and more, we are becoming capital-goods exporters," says Cliff Waldman, economist at Manufacturers Alliance/MAPI, a business research organization. Commerce Dept. figures show capital-goods exports for January to May, 2004, were 16% more than for the same period in 2003, with a 26% jump in industrial machinery leading the way. Waldman expects exports of goods and services to keep climbing at an annual pace in the low double-digits through 2005.

That's good news for companies such as 3M (MMM ). The St. Paul (Minn.) conglomerate registered a record second quarter, with growth in all regions. Sales in Asia surged 18%, while Latin America, Canada, and Africa saw a 13.8% increase. In the U.S., revenues rose by a much cooler 2.7%. With 3M also able to boost margins, profits shot up 25% from the previous year. It expects a 21% increase in 2004 overall.

Moreover, the rising tide of exports and imports is a boon for shippers, helping the fortunes of such companies as United Parcel Service (UPS ). Big Brown reported that second-quarter operating income from its international package business shot up 72.2% from the year before. Income from international packages now makes up over 20% of UPS operating profits.

Consumer-goods makers won't be left out in the cold. Many economists expect consumer spending to perk up next year in Europe. The IMF forecasts real GDP growth to accelerate from 2% for 2004 to 2.3%. New salads helped revitalize McDonald's Corp. (MCD ) sales in Europe, which grew at their fastest pace in over two years. And in Asia, even as China's government tries to cool its sizzling economy, big companies such as General Motors Corp. (GM ) and YUM! Brands Inc. (YUM ) -- owner of Taco Bell and KFC -- continue to do well.

Any U.S. business with an international presence will also benefit from a cheaper dollar. Although the greenback has risen recently, it's expected to weaken again as foreign investors grow weary of financing yawning U.S. trade and budget deficits. Economist Waldman forecasts that the dollar will post quarterly declines of 5% to 7% through mid-2005, compared with a basket of other currencies. The weaker the greenback gets, the stronger overseas profits become when exchanged for U.S. currency. American exports also become comparatively cheap. That's why, even as the U.S. economy slows, higher earnings from abroad should soften the blow.

By James Mehring in New York, with Michael Arndt in Chicago

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