Continuing my explanation of why I take a somewhat contrarian view of the media's push for recession, this post will explore March and April articles I was "clipping" on the topics of Industry Leaders and Corporate Profits.
Summary:
Industry Leaders:
Economics is a game of increasing returns. Under this theory, those who take a market lead tend to expand that lead. This happens due to the proclivity of consumers around the world to purchase products, frequent stores and invest money in ways similar to everyone else around them. Thus, to cut through the complexity of global economics, leaders in each industry are often the early indicators of what will follow among their lesser known competition.
Corporate Profits:
In many of these news clippings, mention is made of the horrendous decline in profits for some companies. Yes, it is true. When profits start to fall, especially for industry leaders, it is an excellent bell weather of turbulent seas ahead. However, that should not negate a very basic underlying principle: profits are good. When business make profits,
Industry Leaders:
Accenture profit gains, raises outlook; shares up
Accenture, one of the "The Big 4" consulting firms, brings in revenue from offering consulting and "outsourcing" services. By making huge profits and raising its outlook, Accenture is sending 2 signals to the market place. First, a consultancy makes record profits when its customers have the liquid cash to pay exorbitant prices, on large contracts, over lengthy time periods. Thus, Accenture could not grow revenues if companies didn't at least have a little free cash floating around – something which would not exist in "the worse economy since the Great Depression." Second, some of this cash is probably coming from companies facing tough times and wanting to get leaner (thus the "outsourcing" component of Accenture's profits). Getting leaner is synonymous with raising "productivity" – the exact measure Greenspan used throughout his tenure to explain our robust and expanding economy.
IBM profit rises on services, software strength
Thus showing that Accenture was not an "outlier". IBM, another company requiring on the "free" spending of corporate America for services, is marking expanding revenues. Corporate America considers 2008 Q1 to be a time for productivity improvements to be ready for the next economic sprint.
Interpretation: Yes, the economy is rocky. Yes, companies see some lean months ahead. But industry leaders indicate that this economy is retooling for even more growth in the near term.
Barnes Group Q1 results top Street
Barnes Group is a major manufacturer of aerospace and industrial components. While I wouldn't call them a "leader" in this industry in terms of size, their revenues are tied to the purchasing needs of such leaders. The article states that not only did the company do well in Q1, they raised their forecast for the remainder of 2008, based upon extremely strong demand in aerospace. Aerospace is a sector which requires massive infusion of investment over long time horizons. It doesn't expand when companies predict a coming Depression. Investment in large, expensive items with long manufacturing terms is an excellent test case for the economic outlook from top board rooms.
Corporate Profits:
Alcoa first-quarter profit falls more than 50 pct
This leader in commodity mining is still profitable. Apparently the manufacturing sector isn't completely trashed. Hurting? Yes. Limping a bit? Yes. But the worse period since 24% unemployment and soup lines? Not exactly.
Goldman, Lehman profits beat forecasts, shares rise
Read the article: Profits fell, but the company is STILL PROFITABLE. Despite stock market declines. Despite global panic from our mortgage market meltdown. The leading financial firms are still profitable.
Requisite footnote on the "Econ Contrarian" series:
As with so many other complex issues in this modern world, I don't claim to know what tomorrow holds for the economy. There are just too many competing systems interacting in labyrinthine layers. But, since no one else seems to want to focus upon any of the positive indicators in this complex mix, I think I'll stand in the gap and shine a small, small light to illuminate a few contradictory indicators – indicators which make the more balanced point that while certain segments of the economy will certainly retract a bit after years of unprecedented growth, this doesn't exactly mean the expansion of the new era of Mordor.
On Principle,
CBass
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