The Washington Post

What the earnings numbers from corporate America are telling us about the economy

Earnings season is winding down, with most major companies having reported on how they did in the third quarter. And the results have some interesting lessons for where the economy is going.

Of the 428 companies that have reported, according to FactSet, 70 percent have beaten analyst projections of their profitability. It is shaping up, as analysts had forecast, to be the first quarter in almost three years in which earnings declined. But it wasn’t quite the bloodbath that had been expected. Analysts had forecast a 3.1 percent decline in earnings when the quarter ended, yet so far it has dropped by only 0.1 percent.

But what’s particularly notable is how the good news on earnings came about. It’s not from higher sales. In fact, only 40 percent of the companies that have reported beat analyst forecasts on their revenues. In other words, corporate America found other ways to become more profitable in the third quarter, squeezing expenses such as worker salaries to improve their bottom line even when their top line wasn’t doing all that well.

The FactSet numbers cover only the publicly traded companies that report their results each quarter. But Alan Levenson, the chief economist of T. Rowe Price, has a method for extracting a quick-and-dirty picture of how corporate America as a whole is doing, from the quarterly report on gross domestic product.

Levenson looks at the output by the corporate sector relative to unit labor cost, or pay to workers relative to their production. The results show profit margins staying at historically elevated levels in the July-through-September quarter.

And things aren’t looking great for future revenue, either. According to the FactSet numbers, 62 companies have issued negative guidance about their expected profits, versus 24 who put out positive projections.

Here’s what these numbers may tell us: Even with some apparent improvement in the job market in the past few months, employers still feel no real pressure to sweeten their wages to get good workers. That sentiment matches the flat wages reported in recent jobs reports.

And while workers don’t have the negotiating strength to demand higher pay, allowing businesses to keep improving their profit margins, the economy isn’t growing fast enough to make sales rise in any meaningful way. That allows businesses to increase their earnings even when revenue isn’t rising much.

So, why is revenue rising so slowly? The easy answer is the one that all those companies have used in their earnings conference calls. The global economy is slowing, with Europe likely in recession and key emerging markets such as China and Brazil downshifting their economies’ pace of growth. For worldwide firms, those weakening global economies quickly translate to slower sales increases.

Businesses also have been anxious about the “fiscal cliff,” specifically potential tax hikes and spending cuts. It is less clear how much the politics of the budget debate factored into the third-quarter results and the upward pressure on profit margins. One could imagine some companies putting off purchases of large capital goods to see how things are resolved. To see just what damage that fear caused, we can wait for the fourth-quarter numbers.



Success! Check your inbox for details. You might also like:

Please enter a valid email address

See all newsletters

Show Comments
Most Read



Success! Check your inbox for details.

See all newsletters

Your Three. Videos curated for you.
Play Videos
Making family dinnertime happen
How to make Sean Brock's 'Heritage' cornbread
A veteran finds healing on a dog sled
Play Videos
Drawing as an act of defiance
In search of the Delmarva fox squirrel
The most interesting woman you've never heard of
Play Videos
This man's job is binge-watching for Netflix
The Post taste tests Pizza Hut's new hot dog pizza
5 tips for using your thermostat
Play Videos
Philadelphia's real signature sandwich
5 ways to raise girls to be leaders
Full disclosure: 3 bedrooms, 2 baths, 1 ghoul

To keep reading, please enter your email address.

You’ll also receive from The Washington Post:
  • A free 6-week digital subscription
  • Our daily newsletter in your inbox

Please enter a valid email address

I have read and agree to the Terms of Service and Privacy Policy.

Please indicate agreement.

Thank you.

Check your inbox. We’ve sent an email explaining how to set up an account and activate your free digital subscription.