Corporate profits dropped sharply in the third quarter — 9 percent from a year ago — but if historical trends hold, there may be more pain ahead, economists say.
Corporate profits dropped sharply in the third quarter — 9 percent from a year ago — but if historical trends hold, there may be more pain ahead, economists say. Profit declined more steeply, year over year, in all but one of the 11 recessions since World War II.
“This likely suggests that profits have further to fall in the current cycle,” says Deutsche Bank economist Joseph LaVorgna.
Demand for goods and services by consumers and businesses has collapsed in recent months, as credit conditions remain tight, he adds.
Business earnings are essential for the economy. They influence how investors value stocks and drive spending on capital projects and hiring.
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Stock markets during recessions don’t find their bottom until investors feel corporate profits are turning up, says Michael Boskin, an economics professor at Stanford University and senior adviser to Thomas Weisel Partners. He thinks corporate profits will fall over the next two or three quarters.
To be sure, not all of the quarter’s results were negative. Nonfinancial companies saw a 6.1 percent increase in third-quarter profit from the second quarter, the first increase in more than a year. The gain, though, wasn’t enough to offset the 16.4 percent plunge in financial company profits.