Competition Creates Recession in Corporate Profits

Article excerpt

Although the economy as a whole manages to continue expanding, business is beginning to suffer a profits recession.

The situation is rare since corporate profits are such an integral part of the broader economy. But the evidence is overwhelming: While third-quarter gross national product rose 2.5 percent, corporate profits fell.

Much of the decline was due to a nonrecurring event - money assigned by five big banks to cover anticipated losses on Third World loans - but even without these losses corporate profits in general were off.

While totals are not complete, profits for the companies making up the Standard & Poor's 500-stock index fell 22 percent to $4.98 a share from $6.38 a share in the third quarter of 1988. Excluding the banks the decline was 7 percent.

A survey by the Wall Street Journal showed a 21 percent drop in after-tax earnings on continuing operations, and another by Business Week indicated a 22 percent drop, with both declines negatively influenced by bank performance.

Several industries performed much worse. Within the Standard & Poor's, 13 of 25 industry groups fell from their year-ago levels, compared with eight in the second quarter and just five in the first three months of the year.

Other big declines occurred in the automotive group, aerospace, printing and publishing.

Reviewing the numbers, Wright Investor's Service said it is unlikely to see a fourth-quarter repeat of big bank write-offs, ``but you never know.'' It said ``unusual charges and writeoffs have increasingly become a regular feature of fourth-quarter earnings reports.''

While a sluggish, though still expanding economy has much to do with the declines, intense competition is playing a large role, typified by a 16 percent drop in Sears' profits after it slashed prices in an effort to boost sales. …

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