Glass-half-full take on the economy

Glass-half-full take on the economy

Posted: Wednesday, July 30, 2008 9:08 pm
By: AP

By RACHEL BECK AP Business Writer NEW YORK (AP) — 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 may 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 last year. But remember: U.S. gross domestic product still remains positive, and new data expected to be released on Thursday will likely show a slight gain in second-quarter growth to a pace of around 2 percent. That rise may help explain why corporate earnings haven’t fallen apart. Just weeks ago, forecasts were for the second-quarter earnings season be a complete 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 certainly limped through their latest batch of earnings. But not everyone is in dire straights. 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 over the last 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 just that. Some companies out there are figuring out how to manage this tough environment. Among them is IBM Corp., which saw its second-quarter profit jump a better-than-expected 22 percent. The Armonk, N.Y.-based technology company’s services division, which sells to companies looking to cut costs or better manage their information technology infrastructure, helped fuel the gains. That business has held up remarkably well for IBM despite fears that the economic downturn in the U.S. has pinched off corporate spending. Also surprising: The inflation picture so far 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 already 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 last 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.” It will be important to watch in the months ahead whether that begins to change and companies can no longer swallow the price increases from their suppliers and have to pass them onto their customers. While inflation has been a big concern, there are also mounting fears about credit conditions. Among the worries is whether there will be a surge in bankruptcies, as business and consumers struggle to pay off their loans. The good news is that the default rates in commercial loans and credit cards, while up, remain within historical norms. Lord Abbett senior economist and market strategist 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 around 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 that they’ve been able to get the loans they need, so far. 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. Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org Published in The Messenger 7.30.08

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