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Recession looms over earnings season

Friday stock prices on the Nasdaq show a declining market. The decline is another indication of more trouble ahead, if you follow the conventional wisdom on decisions by investors.

Associated Press

Friday stock prices on the Nasdaq show a declining market. The decline is another indication of more trouble ahead, if you follow the conventional wisdom on decisions by investors.

SAN FRANCISCO — Buckle up and hunker down, because we're in for a rough recession.

That stark message grew louder and clearer last week as more investors fled the stock market because companies reporting third-quarter earnings were pessimistic about the quarters ahead, with bleak forecasts and mass layoffs. The Dow Jones Industrial Average dropped 473 points — 5.35 percent — as many investors shifted their focus from the credit crisis to the economy and didn't like the prolonged, global recession they saw on the horizon.

"We are starting to see wholesale capitulation," said Peter Morici, an economist and business professor at the University of Maryland. "We are headed for some very bad times."

Although not everyone is quite as apocalyptic, the picture emerging from corporate America is unrelentingly gloomy.

If executives from some of the world's largest companies are correct, here are a few of the dreary things to expect in the next few months: Fewer — and cheaper — gifts under Christmas trees. Emptier restaurants because more people will be eating fast food when they do splurge on meals out. More unsold cars sitting in automobile lots. Longer unemployment lines as companies cut costs to offset their declining sales.

Even the bright spots aren't exactly feel-good stories. Two of the largest tobacco companies stood by their profit projections while another raised its earnings outlook, largely because their products usually sell reasonably well even in tough times.

A recession hasn't been declared by the national bureau of economists who look for two consecutive quarterly declines in the United States' gross domestic product. That has yet to show up in government statistics.

But that's an oversimplification that ignores other yardsticks used to identify a recession, including employment, household incomes, retail sales and business production. And business leaders aren't waiting for the official proclamation.

"We are going into what is very clearly a recession mode," Blake Jorgensen, Yahoo Inc.'s chief financial officer, said a few days ago after the Internet company disclosed plans to fire at least 1,500 workers — about 10 percent of the payroll — by the end of this year.

Caterpillar Inc., the world's largest maker of construction and mining equipment, cited the "recessionary conditions" in the United States in a forecast that envisions little sales growth next year.

Even companies seemingly in strong positions are treading more carefully. Internet search leader Google Inc. and software kingpin Microsoft Corp., which combined have $35-billion in the bank, are keeping a closer eye on expenses. Apple Inc. predicted its profits and sales during the holiday season will be well below analyst estimates even though the company sold a record number of Macintosh computers, iPhones and iPods during the quarter it just completed in September.

Even before this brutal month began, the U.S. economy had lost 760,000 jobs this year. This normally might be a sign that a rebound isn't far off. Executives typically hold off on layoffs and other huge cost-cutting moves in the early stages of a downturn — and finally get around to pruning the payroll when the worst is over, said Liz Ann Sonders, chief investment strategist for Charles Schwab & Co.

This time, though, Sonders believes the recession began late last year and probably won't end until the middle of next year, at the earliest.

The steep decline in the stock market is another indication of more trouble ahead, if you follow the rule of thumb that investors are typically making their decisions based on what things will look like in six to nine months.

By the time all third-quarter results are in, the combined operating profits of 1,500 companies tracked by Standard & Poor's are expected to be 13 percent lower than profits in the same period last year. For all of 2008, the operating profits for the same 1,500 companies are expected to be down 26.5 percent.

Recession looms over earnings season 10/25/08 [Last modified: Monday, November 7, 2011 4:43pm]
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