As Wall St. Soars in Tough Era, Company Size Is a Big Factor
It's tough to make sense of the economy these days.
The latest jobs numbers show hiring is down. Taxes are up, austerity reigns in Washington and consumers are skittish. Yet the stock market is defying gravity, marching ever higher in spite of it all.
Behind this seeming riddle lies a confluence of economic forces that is likely to continue to produce good times for the biggest American companies — and the stock market — even if growth, as expected, slows in the coming months.
By pumping hundreds of billions of dollars a month into the global economy, central banks like the Federal Reserve and the Bank of Japan have encouraged investors to put their money into stocks and other riskier investments, increasing their prices. Bullish traders now count on a supportive Fed chairman, Ben S. Bernanke, much as their predecessors did in the 1990s when Alan Greenspan held that job.
At the same time, American giants are benefiting from productivity gains and renewed growth in China and other overseas markets, allowing them to increase profits even if business at home remains lackluster.
"Big companies have found a way not just to survive but to prosper despite the broader economy and all the uncertainty," said Howard Silverblatt, a senior index analyst at Standard & Poor's. "There's a disconnect between them and the rest of the world." Investors are also looking farther ahead, discounting what economists are calling a spring swoon, and focusing on prospects for healthier growth late this year and into 2014.
After finally achieving what experts estimate was a healthy 3 percent annual growth rate in the first quarter of 2013, the American economy is expected to slow to half that pace in the next two quarters as higher payroll taxes and automatic government spending cuts begin to bite.
Signs of that start-and-stop phenomenon have been mounting in recent weeks. After adding more than 200,000 jobs a month since November, the American economy created fewer than half that number in March, surprising some observers who thought the labor market had finally turned a corner.
And on Friday, new data on retail sales showed spending fell 0.4 percent last month while consumer sentiment sank to its lowest since last summer, according to a new survey by Thomson Reuters and the University of Michigan.
Despite that bearish data, the Dow Jones Industrial Average, made up of 30 of the biggest American companies, rose more than 2 percent last week to a record high, and stands within shouting distance of breaking the psychologically important 15,000 level.
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Indeed, while the outlook among small-business owners remains stuck near recession levels, Wall Street is again expecting the largest companies to report strong results when they announce first-quarter earnings in the coming weeks.
That is especially true for the very biggest corporations. While analysts estimate profits for the 100 largest companies in the Standard & Poor's 500-stock index to rise 6.6 percent this quarter, earnings for the bottom 100 are expected to fall by 1.6 percent.
Of all the profits earned by the companies that make up the S.& P. 500, 22 percent will come from the 10 largest companies, up from 18 percent in 2010, according to Mr. Silverblatt.
The same phenomenon is playing out among privately owned firms as well. Over the last three years, sales at companies with revenue of more than $50 million have grown by an average of 15.3 percent annually, compared with 8.5 percent annual growth at businesses with less than $50 million in revenue, according to Sageworks, a financial information company.
Among the smallest privately owned firms, the mood is especially bleak.
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"It's a bifurcated economy," said William C. Dunkelberg, chief economist at the National Federation of Independent Business, which represents small-business owners. "Corporate profits are at a record, but all the data we have say small business is dead in the water." Last week, the group reported that its Small Business Optimism index declined in March after rising for the previous three months.
Big companies also enjoy much easier access to credit than smaller companies, which still face wariness from banks nervous about lending to borrowers without sterling credit histories.
The fiscal tightening in Washington — primarily the automatic budget cuts imposed by Congress that are now taking effect at government agencies and the increase in Social Security taxes this year — is also poised to fall more heavily on smaller, domestically focused firms than on multinational giants.
In fact, the case of General Electric, which reports first-quarter earnings on Friday, neatly illustrates how overseas operations at many of the most familiar American companies have grown rapidly in recent years even as domestic activity has lagged. Total employment at the company dipped slightly to 305,000 in 2012 from 316,000 in 2005, but the number of workers it employs in the United States fell more sharply, to 134,000 from 161,000 in 2005. Over the same period, the proportion of sales that came from the United States fell to 47 percent from 55 percent.
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The gains in the stock market have also been fueled by a sense, perhaps premature, that the American economy will start growing more robustly again once the shock from fiscal austerity begins to pass.
"The current slowdown will be the last for a while," said Ethan Harris, co-head of global economics at Bank of America/Merrill Lynch. He estimates that after growing by annual rates of only 1.3 percent in the second quarter and 1.5 percent in the third quarter, the economy will expand by 2.5 percent in the final months of the year and maintain that pace in 2014.
"We're getting closer to the end of chronically disappointing growth," Mr. Harris added. "It's not like we're going to have a huge boom but something that feels sustainable."
The austerity in the United States also threatens to slow, at least temporarily, sectors of the economy that have been more dynamic recently, like housing and autos. But over the long term, the rise in home values in many areas as well as the rally on Wall Street could produce something of a "wealth effect," at least for wealthier households that feel they can afford to loosen their purse strings slightly.
Poorer households remain constrained, however, especially in the wake of the increase in Social Security taxes in January.
"For people who spend all of their take-home pay each month, the stock market has no impact," said Chris Varvares, senior managing director at Macroeconomic Advisers. "Even if they felt better about the economy, they wouldn't be able to spend more."