Economists See Silver Lining in U.S. Economic Situation

Thu February 13, 2003 - National Edition

Discouraging words are coming from the corner office, but the economists down the hall see the glass as half full.

Where CEOs see corporate earnings that have been cut in half since September 2001, economists see an unemployment rate at the historic post-World War II average.

Where CEOs see continued weakness in business spending, economists point to declines in the dollar, which help manufacturers sell products overseas and compete with foreign goods at home.

Economists also see gross domestic product for 2002 at 2.8 percent, a half percentage point higher than during the 12 months following the last recession.

But that hasn’t stopped executives of Boeing Co., Kraft Foods Inc., Tenneco Automotive Inc., Newell Rubbermaid Inc. and a raft of other companies from forecasting lower-than-expected earnings or downbeat outlooks for 2003.

Struggling through a worldwide air travel slowdown, Boeing knocked $1 billion off its 2003 revenue estimates and $2 billion off revenue guidance for 2004.

Heavy manufacturers remain pessimistic about the long-awaited capital spending pickup. And companies such as Chicago-based energy giant Exelon Corp. see lackluster demand from their business customers.

"We expect 2003 to be another very challenging year," Caterpillar Inc. Chairman Glen Barton said in announcing 2002 results. "In addition to market pressures and political uncertainty, we are faced with rising employee health-care and pension expenses."

But could it be that CEOs are overdoing it a bit, trying to underpromise instead of underdeliver?

Corporate hand-wringing "is overdone, and it feeds on itself," said Curt Hunter, head of research at the Chicago Federal Reserve. "They all talk to each other. One says things are bad, and then it builds."

Burned by retribution from the exuberance of the late 1990s, companies also are being "appropriately careful about not misleading the Street," said Timothy O’Neill, chief economist of BMO Financial Group and leader of a national economists’ group.

"Generally speaking it’s probably true that companies’ public positions are somewhat more pessimistic than what their internal planning shows. They’ve been burned by a couple of false starts where they thought things were getting better and they weren’t," O’Neill said.

But executives say they’re telling it like it is.

"I think it’s real," said Allstate Corp. Chairman Ed Liddy, who warned shareholders Thursday that the insurance company wouldn’t be able to sustain more rate hikes this year. "Especially if you’re a manufacturer and there’s just no demand, you’re struggling."

The top guns are voting with their wallets, too.

Insider stock selling has spiked in the first two months of the year, with eight times more selling than buying, according to Thomson Financial.

"If you’re a CEO, the most recent recession was a horrible one, and the recovery has not been rapid. The market is down for a reason," said Jay Mueller, portfolio manager and economist of Strong Investments in Milwaukee. "That’s why CEOs are so gloomy."

Investors are pricing in the corporate gloom, along with specific worries about war with Iraq and pension funding for an aging workforce. There are plenty of legitimate reasons to be concerned, execs say.

The Standard & Poor’s 500 Index closed Friday at 829.69, down nearly 6 percent since Jan. 1.

Analysts, who take their cues predominantly from companies rather than economists, are still aggressively cutting their estimates for corporate earnings in the first and second quarters, said Chuck Hill, research director of First Call, a data firm.

"The slashing started last fall, then leveled off at the holidays," Hill said. "The hope was that we’d revert to normal trimming after the first of the year. Unfortunately, slashing is still the word."

Earnings estimates for the second quarter already have been halved since October, according to First Call.

But hold the phone, say economists, many of whom believe we’re in the early stages of a pickup.

"Executives have always been jokingly referred to as lagging indicators," said O’Neill. He expects a significant economic rebound in the second half of the year.

But CEOs have heard that one before. In the last recession, which ended in 1991, the jobless rate crept up for a full year after the downturn technically ended, finally hitting 7.4 percent.

This time, unemployment has risen, but not to that level. Instead, corporate profits have taken a beating.

Adding to the confusion for investors, the economic data clearly is spotty at best.

Despite Friday’s Labor Department report showing the unemployment rate fell to 5.7 percent from 6 percent, soft spots remain in the job market, said Wells Fargo economist Sung Won Sohn.

"The report is not as encouraging as it sounds," he said, noting that two-thirds of the job growth came from seasonal factors in the retail sector.

The prospect of war with Iraq and continued investor mistrust of financial markets are two other factors heavily influencing corporate earnings, said John Vail, senior strategist in Chicago of Mizuho Securities.

"I think we’ll see growth this year, but subpar to average recovery growth," Vail said.

What’s an investor to make of the confusion?

"The good news is that a lot of this is already behind us," said Mueller, referring to the economic factors behind the CEOs’ fear. "But investors have to have more realistic expectations and need to be content getting rich slowly."