Sun Jul 25, 2004
By Reshma Kapadia
NEW YORK (Reuters) - This summer's mixed bag of strong earnings growth and conservative company forecasts combined with soft economic data are fueling a debate about whether the United States is facing an economic slowdown.
Economic data in June were slow over a wide range of areas including retail sales, industrial production, jobs and housing. Analysts say they will be looking for improvements in July.
"July is a critical month. Does the economy stay on an accelerated course or are we seeing a slowdown?" said Tim Ghriskey, chief information officer at Solaris Asset Management.
Strong earnings reports in the second quarter were accompanied by company warnings about cautious technology spending. Other worrisome signs included slower sales growth at blue-chip manufacturers such as 3M (MMM.N: Quote, Profile, Research) , rising auto and semiconductor inventories, and an easing in General Electric Co.'s (GE.N: Quote, Profile, Research) June short-cycle orders for various products.
Some economists called the slow June data an anomaly due to worries about the war in Iraq, mounting pricing pressure in technology and bad seasonal weather.
But Lakshman Achuthan, managing director at Economic Cycle Research Institute, said he thinks the recovery has reached a deceleration phase.
"We are still going to get growth, but not the profit growth we saw earlier and that drives capital spending," Achuthan said.
Federal Reserve Chairman Alan Greenspan last week pointed to signs of weakness in the economy, saying businesses were unusually reluctant to spend and hire, and the economy could benefit if that caution ebbs.
MATCHING FIRST-HALF EARNINGS GROWTH
About half the S&P 500 companies have posted results for this quarter, reporting 22.9 percent earnings growth, according to Reuters Research senior market analyst Ashwani Kaul.
Kaul expects S&P 500 companies to post second-quarter growth of 24 percent to 25 percent compared with 24.5 percent in the first quarter. Companies have not raised second-half forecasts as much this year as they have in the past.
While executives talked this month about economic strength, few gave substantially higher forecasts for the second half.
"I know there's a lot of questions about recovery ... but we have a pretty broad-brush look at it and everything looks pretty good so far," Honeywell Chief Executive David Cote said on an earnings conference call about industrial strength.
The diversified manufacturer raised its 2004 earnings forecast, but analysts called the outlook conservative.
GE CEO Jeff Immelt called the U.S. economy "the best in years," but the conglomerate did not raise its second-half outlook.
"There is genuine uncertainty at the moment about whether growth will re-accelerate in the second half or see further fading," said Nigel Gault, U.S. economist at Global Insights. Executives "have to prepare the markets that they can't continue with the same kind of (earnings) growth -- even if the economy re-accelerates."
By mid-July, about 20 software companies had issued earnings warnings amid slower technology spending, according to research firm Gartner Inc.
AUTOS AND TECH
Inventory levels in the technology and automotive sectors also have Wall Street worrying about potential production cuts across a range of industries.
Near record-breaking inventory at automakers Ford Motor Co. (F.N: Quote, Profile, Research) and General Motors Corp. (GM.N: Quote, Profile, Research) has weighed on the sector, as U.S. June vehicle sales skidded to their slowest pace in nearly six years.
Assembly plant shutdowns in July helped clear some inventory and higher incentives may lift sales this summer. Still, the auto sector is bracing for possible fourth-quarter production cuts as some suppliers have already cut forecasts for the third quarter and full year.
Downplaying the worries, auto industry veteran Richard Dauch, chairman of the National Association of Manufacturers, on Friday said he has seen darker days.
"This is a cakewalk," Dauch told reporters in Detroit, referring to cyclical ups and downs in the auto industry.
But concerns of growing inventories have also hit computer chips builders.
Motorola Inc.'s (MOT.N: Quote, Profile, Research) spinoff last week of Freescale Semiconductor (FSL.N: Quote, Profile, Research) was steeply discounted amid diminished interest for chip stocks.
"Right now the sentiment is about as negative as I can remember it without the economy in a recession," said David Wu, analyst at Wedbush Morgan Securities.
Still, not everyone is talking about a slowdown.
Corning Inc. (GLW.N: Quote, Profile, Research) , the world's largest maker of fiber-optic cable, boosted capital expenditures this year by more than 40 percent, citing demand for LCD glass.
"The June slowdown is being hyped," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut. "Markets don't move straight up, and an economic recovery doesn't either." (Additional reporting by Tom Brown in Detroit, Ben Klayman and Sue Kelly in Chicago and Ben Berkowitz in Los Angeles)
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