Lame Profits Feed Recession Fears

Declining profit growth adds to the mounting evidence foretelling a possible recession for the U.S. economy.

With the third-quarter earnings season nearing a close, the year-over-year profits for Standard & Poor's 500 companies declined 3%, according to Thomson Financial. The drop marks the first quarter in five years that American corporations have recorded an aggregate earnings decline. Thus far, 461 companies in the S&P 500 have reported earnings.

The last time investors experienced a negative quarter was in the first quarter of 2002, when the market logged an 11.5% decline. Profit declines during the recession of 2001 included a third-quarter drop of 21.6% and a 21.5% drop in the fourth quarter.

"Profit declines portend recession if they lead to cutbacks in capital spending and labor," says John Lonski, chief economist at Moody's Investors Service. Lonski believes there is about a 40% chance of recession at this time, as the housing recession continues to spill over into the rest of the economy.

Recent data suggests both business spending and employment may be on the wane. The Philadelphia Fed and New York Empire State surveys of regional economic activity published Thursday showed that capital spending fell sharply this month. The Philly Fed survey's index of planned capital spending fell to 7.1 in November, compared with a 20.5 reading in October and a six month average of 19.7. The New York survey shows a similar drop. Its index of planned business spending fell to 19 in November from 27.9 in October and a 26.5 six-month average.