Stephen J. Balog, executive vice president and stock analyst at Lehman Brothers Inc., had just finished bemoaning that the profits of U.S. companies were disastrous. He turned from his desk in the World Financial Center overlooking the Hudson River in New York and called an assistant on his office intercom to ask for some evidence of his claims.
So far, responded his researcher, third-quarter earnings were "flat, or up a couple percent."
"What happened to the recession?" Balog asked.
"I'm still waiting for it," came the response.
In a sign that the U.S. economy may be more resilient than many experts have feared, U.S. corporations managed to post a small gain in third-quarter earnings compared with last year's performance, according to experts who monitor profits.
While profits in the latest quarter looked good only when held up against the rather dismal performances of a year ago, the showing marks the first time in 15 months that quarterly earnings have even risen.
Analysts said the performance suggests that the economy _ despite soaring oil prices, plunging consumer confidence and strains in the banking system _ still is muddling ahead and may not yet be in a recession.
"Everyone out there is gloomy, but when you look at the numbers, you could say that corporate earnings have turned upward," said Ben Zacks, executive vice president of Zacks Investment Research Inc., a Chicago firm that tracks earnings.
The gains aren't across the board. Some industry groups, like airlines, retailers and banks, have been battered, owing to special problems affecting their businesses. And nobody is suggesting that profit levels show healthy growth or flag a robust economy.
But according to Zacks' analysis, based on reports from more than half of the 500 major American companies that it monitors, earnings from continuing operations are up about 5 percent from a year ago.
"These are not recession-level profits," said Abby Joseph Cohen, one of the top two market strategists at Goldman Sachs & Co., a leading investment bank here. Instead, she said, they indicate that "we have an economy that is gradually weakening."
That view was echoed by Michael DiCarlo, director of equity research at John Hancock Mutual Funds Inc. in Boston, who emphasized that the uptick in profits for the quarter was in contrast to the overall downward trend of the past year.
"That would indicate that you're getting a slowing economy, but not necessarily one that's going to tumble into the abyss," DiCarlo said.
A business downturn typically has a sharp, negative impact on profits because companies suffer from a fall in sales without a corresponding drop in costs for labor and overhead. But many companies managed to protect their profit margins to a greater degree than expected in the third quarter, either by raising prices or by laying off workers, economists said.
"Productivity growth has been quite good. The manufacturing sector is keeping itself very trim," said Helen D. Hotchkiss, senior economist at the New York office of the European bank Barclays de Zoete Wedd Ltd.
Other companies benefited from strong sales abroad, with their export business boosted by the fall in the value of the dollar that makes their products cheaper overseas. Some oil-producing companies enjoyed a windfall profit from the jump in the value of their inventories of crude oil, but that advantage was offset for larger, more integrated companies that found themselves unable to raise product prices as quickly as crude costs were rising.
While analysts have been relieved about profits at many companies, special problems sent some industries reeling. Several leading banks, notably Chase Manhattan Corp., suffered because of hefty writeoffs from loans that have soured in the commercial real estate market. The spike in jet fuel prices raised airline expenses dramatically at a time when stagnant travel demand made it harder for them to pass on all the added costs in the form of higher fares.
The oil price jump also hit hard at some basic industries, like chemicals and paper, that consume significant amounts of energy and are particularly vulnerable to cyclical slowdowns in the economy.
"Demand is weaker than it had been (for these companies), and they're on the other side of rising oil prices," Cohen said.
In addition, in a development that could forewarn of troubles ahead for the economy, results were disappointing overall in the retail industry. That could mean that consumers, whose spending accounts for about two-thirds of every dollar spent, have begun to cut back on buying.
"We're beginning to see quite a bit of weakness in retail. We already began seeing it earlier this year, and it's getting worse," said David A. Wyss, chief financial economist at DRI/McGraw Hill, an economic consulting firm in Lexington, Mass.
Wyss said the third quarter began fairly strongly for the economy, in July, but conditions worsened dramatically once oil prices began climbing after Iraq's invasion of Kuwait in early August. As a result, he said in an opinion also expressed by several analysts, the results in the fourth quarter will be a more significant, and probably tougher, test of the health of profits and the economy.
"The third quarter was really not so horrible. It's the fourth quarter where things are really going to look bad" unless the economy picks up, Wyss said. Some analysts, like Balog at Lehman Brothers, said earnings seem satisfactory only to the extent that expectations were lowered dramatically following the eruption of the Middle East crisis.
"Compared to what I slashed (profit estimates) to last week, it's a little better," he said. "Going back 45 days, it's a disaster."