The causes of the expected decline are many. In addition to the
anemic economy in the United States, much of Europe has fallen into
recession while the Chinese economy, once white-hot, has slowed.
The boom in American corporate profits, which has far outpaced the gains in the broader economy since the end of the past recession, is faltering.
Giants like FedEx and Intel, two bellwethers of the global economy, are warning of lower quarterly profits because of weakness in worldwide demand. Companies outside the United States are feeling the pinch, too. Burberry, the British luxury retailer that had seemed immune to a slowdown, is offering a similar warning.
Even smaller, family-owned companies like Eastman Machine in Buffalo, New York, which makes cutting equipment for the textile industry, are wary. "We feel like we are walking on a tightrope," said Robert L. Stevenson, Eastman Machine's chief executive.
Over all, Wall Street expects quarterly profits at the typical large U.S. company to decline for the first time since 2009.
The causes of the expected decline are many. In addition to the anemic economy in the United States, much of Europe has fallen into recession while the Chinese economy, once white hot, has slowed. There is also the looming prospect of automatic tax increases and spending cuts in Washington, which has caused companies to sit on the sidelines.
After reducing spending and eliminating jobs during the recession, American companies reaped huge gains by keeping expenses down and putting off aggressively hiring new workers as economic growth slowly returned. Strong profits have also propelled the stock market higher, reassuring investors whose other assets, like real estate, have declined in value over the same period.
But while the Standard & Poor's 500-stock index reached its highest close Friday since 2007 -- after the Federal Reserve's announcement of its latest stimulus effort -- the cycle of steady earnings increases appears to have run its course.
"A lot of the profit gain you had in the last few years was a bounce from the recession and a result of very aggressive cost- cutting," said Ethan Harris, chief U.S. economist at Bank of America Merrill Lynch. "Those factors are going to be very hard to replicate."
The expected decline in profits has yet to set off big layoffs. But it is another factor that is inhibiting hiring and keeping unemployment above the politically important level of 8 percent, executives and economists say.
Last week, the Federal Reserve announced its boldest effort yet to stimulate the U.S. economy and confront persistently high unemployment. The next day, the government reported that industrial production had fallen 1.2 percent in August, the biggest monthly contraction since March 2009.
While executives welcomed the Fed's announcement, many express concern over just how much effect it will have.
More than half of managers at North American companies now expect production levels to increase in the next 12 months, down from 64 percent in the second quarter, according to a survey by CEB, a member-based advisory firm. In the same survey, the percentage of executives who expect to hire more workers fell to 34 percent from 41 percent last quarter.
"We're sort of like in this limbo environment," said Gregory T.
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