When Will Companies Snap Out of It?
What's been showing up in this quarter's earnings reports should now show up in Friday's third quarter gross domestic product release: Corporate America is worried, and its move to the sidelines is slowing down the economy.
"It's kind of an about-face from the way it was a year ago," said Michael Feroli, chief U.S. economist at JPMorgan. "It does feel like there is a disconnect. … Generally the consumer tends to lead, but it is all the stranger that business is turning down now because it's not like the consumer is exceptionally weak."
Feroli cut his forecast for third quarter GDP growth to 1.6 percent from 1.8 percent, after Thursday's disappointing durable goods report. (Read More: Weekly Jobless Claims Slide, Durable Goods Orders Surge)
GDP is released Friday at 8:30 a.m. EDT. The final reading on second-quarter GDP was a weak 1.3 percent increase, down from the first quarter's 2 percent rate.
Consumer sentiment is also reported Friday, at 9:55 a.m. when the Thomson Reuters/University of Michigan consumer sentiment survey is released. The preliminary October reading, released Oct. 12, showed a surprising jump in sentiment to 83.1, its highest level in five years. Last week's September retail sales report, an important gauge of consumer strength, rose 1.1 percent in September, with spending on everything from cars to electronics expanding.
Dean Maki, chief U.S. economist at Barclays, said he expects GDP growth of 2 percent for the third quarter. "After today's durable goods report, the risk to that looks to be a little to the downside. … What will be interesting about the report is we think it will reflect a strengthening on the consumer side and continued robust residential investment growth, but a notable weakness on business investment spending. So business and the consumer are going in different directions right now."
The impact of Europe's slowdown is arguably the biggest hit to profits, and Asia's weaker growth is also a factor.
But CEOs have been blaming pre-election uncertainty about policy and taxes, and they fear the "fiscal cliff" — the hit to the economy that could come if the lame duck Congress fails to act on expiring tax cuts and automatic spending cuts that start Jan. 1. (Read More: Jamie Dimon: CEOs Already Cutting Back Due to 'Fiscal Cliff')
"I think it's reflecting uncertainty, as well as the slowdown in global growth," Maki said. "Businesses are attuned to both these things. When uncertainty rises, businesses will hold off capital projects. Corporate profits have slowed."
So far, half of the companies in the S&P 500 index have reported earnings. While 62 percent have beat earnings estimates, a surprising 64 percent have missed revenues estimates. Many have also warned that fourth quarter forecasts are too high. The 500 companies are expected to report profit growth of 1.3 percent, an improvement from the loss expected before reporting season.
The durable goods report tells the same story that many technology companies revealed this quarter — capital expenditure spending is soft and that's hitting revenues. Even though the durable goods report showed new orders received by manufacturers jumped by 9.9 percent in September, a big chunk of that was driven by aircraft orders. Without those orders, durable orders rose just 2 percent. But the core capital goods orders were flat, and core capital good shipments were down 0.3 percent. Feroli points out both those numbers were weak in the past few months, and while some rebound was expected they are also numbers that tend to be strong in the third quarter.
Feroli notes that to make it worse, the numbers were revised down in August, and the three-month average annualized change shows shipments declining at a 4.9 percent rate and orders falling at a 23.5 percent annual pace. "The orders still look pretty bad, so it doesn't look like you're getting any momentum heading into (the fourth quarter)," he said. Feroli expects 2 percent growth in the fourth quarter.
"Declines of these magnitudes are seldom seen outside of recessions; this isn't meant to raise recession alarms, but instead to highlight that we have the consumer to thank for keeping the economy above water," he wrote in a note Thursday.
Maki said there have been times when the consumer has led. For instance in the late 1990s when Asia went into recession, energy prices dropped and U.S. consumer spending boomed. He said energy prices, falling rapidly, may start to help the consumer now. He said the economy, however, could feel some impact from the fiscal cliff next year and he expects growth of 1.5 percent to 2 percent next year.
"In that environment businesses are not going to open up and start spending freely," he said, adding that what is needed is a "grand bargain" in Congress, where they enact tax reform and fiscal reform.
(Read More: Obama: Post-Election Cliff 'Grand Bargain' Possible)
"This quarter for the corporate sector, it's understandable why they are pulling back on the investment spending front. Consumers are less affected by each of these forces. We don't have proxies of uncertainty having a large effect on consumer spending. Consumers usually spend based on their income and their wealth," Maki said.
Economists say consumers may be feeling better about their personal wealth, based on the increase in housing prices this year and the 12 percent increases in stock prices since Jan. 1.