TBO.com - TBO is Tampa Bay Online

Economic Gloom And Doom Abound, But The Glass Is Really Half-Full

ADVERTISEMENT

By RACHEL BECK The Associated Press

The Tampa Tribune

Published: July 31, 2008

NEW YORK - Just for a minute let's set aside all the bad things plaguing the financial world. Even in these gloomy times, there's some good news worth checking out.

The economy is still growing, though slowly.
Corporate earnings are coming in stronger than expected.

Higher prices aren't showing up in every last thing we buy.

The credit storm isn't as terrible as it might look.

These factors might not prevent the economy from slipping into a recession or even fuel big stock gains. They are more like a glimpse of hope that things might not be as awful as they feel.

It may be hard to see much good in this sea of trouble. The housing market collapse, the credit crisis and soaring energy and food prices are hurting many consumers and corporations.

All that has taken its toll on economic growth, which has decelerated in the past year. But remember: U.S. gross domestic product remains positive, and new data expected to be released today likely will show a slight gain in second-quarter growth to a pace of about 2 percent.

Earnings Top Expectations

That rise may help explain why corporate earnings haven't fallen apart. Just weeks ago, forecasts were for the second-quarter earnings season to be a bust. Stock investors were selling off shares on expectations companies wouldn't weather the ugly combination of soaring costs and cash-strapped customers.

For some in corporate America, the reality has been that bad - airlines, financial firms, toy companies, restaurants and more have limped through their latest batch of earnings.

But not everyone is in dire straits. Of the more than 200 companies in the Standard & Poor's 500 stock index that have reported quarterly earnings so far, more than 70 percent have topped expectations - well above the historical average during the past decade of 63 percent, according to Bespoke Investment Group.

Naysayers would likely argue that earnings estimates had been beaten down so much that they were easy to top, but there is more going on than that. Some companies are figuring out how to manage this tough environment.

Among them is IBM, which saw its second-quarter profit jump a better-than-expected 22 percent. The technology company's services division, which sells to companies looking to cut costs or better manage their information technology infrastructure, helped fuel the gains. Business has held up remarkably well for IBM despite fears that the downturn in the United States has pinched off corporate spending.

Also surprising: The inflation picture this summer isn't as troublesome as the soaring food and fuel costs might lead one to believe.

So far, many companies aren't passing along their increased costs to consumers. They recognize that the financially strained public - which is contending with $4 a gallon for gas and for milk - will balk at paying more for everything else.

For evidence, compare the consumer price index's headline number, which includes food and fuel, to the core number, which strips it out. The headline number in June rose 1.1 percent; the core rose 0.3 percent. The spread between the two - which works out to 0.8 percentage point - is rarely so big. It has happened less than 1 percent of the time in the past 48 years, according to research by Merrill Lynch.

"Inflation is all the rage, even through it remains a two-trick pony between food and fuels," said Merrill Lynch chief North American economist David Rosenberg. "The story beneath the story is that there remains, seven years into this commodity explosion, an unbelievable lack of pass-through into the rest of the pricing system."

Watch The Credit Picture

It will be important to watch whether that begins to change and companies can no longer swallow price increases from suppliers and have to pass them on to customers.

Even though inflation has been a big concern, there also are mounting fears about credit conditions. Among the worries is whether there will be a surge in bankruptcies as businesses and consumers struggle to pay off their loans.

The good news is that the default rates in commercial loans and credit cards, although up, remain within historical norms.

Lord Abbett senior economist Milton Ezrati notes that default rates on commercial and industrial loans were 0.69 percent in the three months ended in March, well below the 1.2 percent rate in 2003, when the economy grew at an annual pace of more than 4 percent. Credit card defaults trend about 4.7 percent compared with 6 percent five years ago.

Another concern is whether businesses are struggling to borrow money to finance their operations. Recent data from the National Federation of Independent Business found that many of its members, who are small-business owners, say they have been able to get the loans they need. Those loans help expand businesses that create jobs.

Yes, the economy has a slew of problems. Yes, we may yet have a recession. Sure, the nation's budget deficit may be heading toward a record. But there are still some reasons to see the glass half-full.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT