recovery
Another brick in the recovery road: Revenue rebounds
January 28, 2013: 5:00 AM ETThe gap between sales and earnings growth is shrinking. That's a very good sign.
FORTUNE -- It's not always all about the bottom line.
Analysts and investors are normally focused on corporate profits. But the most interesting sign of where the market and the economy are headed this earnings season could be coming from the top of corporate ledgers, rather than the bottom.
Of the 147 companies in the S&P 500 that reported their fourth quarter results through Thursday, 65% have beaten analysts sales expectations, according to data provider Thomson Reuters I/B/E/S. Beats are typical. Wall Street tends to low-ball. But that's not what had been happening lately. In the second and third quarters of 2012, just 40% of all companies had sales that were better than expectations, meaning 60% of all companies missed expectations. (UPDATE: As some readers have pointed out, some of those companies may have just met expectations, not all missed. I believe the rest of the story is correct.) That was a worrying sign.
MORE: Fiscal cliff may have given the economy a lift
Earnings tend to roar back faster than revenue when the economy turns. But in this recovery the divergence between corporate profits and sales has been wider and gone on longer than usual. That's not sustainable. Companies can only boost their earnings through layoffs and other cost-cutting measures for so long. To keep the recovery going, people eventually have to begin spending money, and sales growth takes over. But that's not what was happening. Instead, sales fell 1% from a year before in the third quarter. That lead some strategists to argue we had hit an earnings peak.
So the rebound in revenues is a very good sign. What's more, sales growth is expected to account for roughly 85% of the increase in corporate profits last quarter, meaning more and more of the bottom line improvements are coming from economic growth, and not from cost-cutting or accounting gains.
Not everyone is convinced this is good news. Falling expectations can account for some portion of sales beats. What's more, the euro strengthened a bit in the fourth quarter, which can make sales expressed in U.S. dollars seem higher. And it's not like sales are taking off. The average company in the S&P 500 is estimated to have seen a 2.3% jump in revenue in the last three months of the year. Take away inflation, at 1.8%, and that's really not much. "These aren't great numbers," says market strategist Jim Bianco. "We've rebounded from a disaster to just average."
MORE: Why Americans still feel poorer
Nonetheless, you have to start from somewhere. And there are a number of signs sales growth can continue. Citigroup strategist Tobias Levkovich says the longer than expected lag in sales growth was because of credit markets, which were still tight as recently as the end of 2011 thanks to European debt fears. But credit started finally easing in early 2012. When that happens, sales growth tends to follow 9 to 12 months later. That's what we have been seeing, says Levkovich. And with the Fed likely to keep borrowing rates low for some time, revenue growth should continue.
Levkovich adds that sales growth doesn't need to be as big as it once was to produce gains. Technological change means that companies have a lot more leverage to boost profits as the economy recovers. "I would hear people say that profits were incredibly high and just shake my head," says Levkovich. "The argument was faulty to begin with."
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Earnings likely to disappoint in second quarter
There goes the one thing this recovery had going for it.
FORTUNE -- The recovery might soon hit its time limit.
One of the biggest disconnects of the recent rebound is the fact that while corporate profits have surged, hiring has remained weak. Executives have said uncertainty has kept them from adding workers. But the assumption was that eventually sidelined workers would be snapped up by corporations awash in a rising amount MORE
Stephen Gandel, senior editor - Jun 29, 2012 9:25 AM ET -
On Labor Day, a grim picture for workers
Two years after the recession ended, U.S. workers still face a grim job market. And with tepid economic growth and an election year breeding uncertainty, companies are likely to have the upper hand for some time.
By Katherine Reynolds Lewis, contributor
FORTUNE -- It's a tough time to celebrate the American worker. This coming Monday marks the third consecutive Labor Day with an unemployment rate topping 9% and 14 million Americans looking for work. MORE
Sep 2, 2011 5:00 AM ET -
Anatomy of a soft economy
It's been a tough slog coming out of the Great Recession. As for a double dip, consider this: We've had only three in 160 years. Here's a look at how this recovery compares with recessions past.
By Nicolas Rapp and Katie Benner
Reporter associate: Doris Burke
Note: Recovery of GDP growth rates is based on real GDP adjusted for inflation. Employment is seasonally adjusted.
Sources: Bureau of Economic Research; Bureau of Economic Analysis; Bureau MORE
Aug 18, 2011 5:00 AM ETPosted in: bond yields, bonds, Economy, employment, Great Recession, jobs, Macro, recession, recovery, unemployment -
Tides of March: Did U.S. economy crest this spring?
Did the U.S. economic expansion wilt this past spring, allowing another recession to take root?
Gluskin Sheff economist David Rosenberg believes it did. It isn't just that the unemployment rate bottomed out in March at 8.8%. Rosenberg notes that real disposable income, household employment, real business sales and manufacturing output all peaked that month.
Skepticism about U.S. growth is catching lately, what with Goldman Sachs and Bank of America both cutting their MORE
Colin Barr - Jul 18, 2011 2:16 PM ET -
U.S. recovery, rest in peace
The recovery is over.
So says UCLA economist Ed Leamer. He notes that May brought the first year-over-year decline in the Pulse of Commerce Index of domestic diesel fuel use since the end of 2009 – the latest yellow flag to be raised over the sputtering U.S. economy.
The index, which indirectly tracks industrial production via trucking mileage, has now declined in four of the five months this year and in eight of MORE
Colin Barr - Jun 8, 2011 11:28 AM ET -
Why companies are about to start hiring
In a nutshell, it's because they don't have much choice.
The bright spot in a drab employment picture is that workers have been stretched so thin during the past couple years that companies are going to have to (gasp!) hire more.
You may be understandably suspicious. Corporate America has been raking in massive profits – they flooded in at a record $1.68 trillion annual rate in the fourth quarter of 2010 MORE
Colin Barr - May 6, 2011 6:32 AM ET -
Credit gains drive Citigroup profit
Citigroup's unlikely recovery continued Monday, as the bank beat Wall Street estimates with its fifth straight quarterly profit.
Citi (C) made $3 billion, or a dime a share, for the first quarter of 2011. That compares with a year-ago profit of $4.4 billion, or 15 cents a share. Revenue fell to $19.7 billion from $25.4 billion a year earlier.
Wall Street analysts were calling for a 9-cent profit on revenue of $20.6 MORE
Colin Barr - Apr 18, 2011 8:12 AM ET -
Slow recovery keeps on truckin'
The economy may not be as vulnerable to $110 oil as you might imagine.
That's one message out of the latest Ceridian-UCLA Pulse of Commerce Index. The index rose 2.7% in March, wiping out declines in the first two months of 2011 and suggesting a modest economic recovery remains on track, in spite of the soaring price at the pump.
The index tracks U.S. diesel fuel use and as such is a MORE
Colin Barr - Apr 12, 2011 1:00 PM ET -
CEO overconfidence alert
Are America's optimistic CEOs getting a little carried away?
The Business Roundtable's CEO outlook index hit its highest level on record in the first quarter, the trade group said Wednesday. The 9-year-old index, measuring expected sales, capital spending and hiring trends, hit 113 – a full 7% above than the previous high water mark.
A survey of 142 chief executives showed 92% expect sales to rise in the next six months, and MORE
Colin Barr - Mar 30, 2011 11:28 AM ET
