The Unmentionable Phrase for 2011 - "Declining Corporate Profits"

For a while I have been searching for some insight into what 2011 might hold in terms of investing and general business conditions. Not much on the topic appears in the business press, yet as the recession lingers more folks wonder if there is an end in sight.

This week, for the first time since before Mar. 2009, I have read what many consider the most unmentionable of business phrases ... "declining corporate profits."

With revenue growth basically non-existent, corporations have increased profits through cutting employees and squeezing out cost reductions. This process has run its course and profits have rebounded, causing the bear market rally in stocks starting in Mar. 2009.

However, unemployment, the trade deficit, and the failure of the stimulus package have combined to hinder the US recovery leaving corporations with few new options to achieve consistent increases in profits.

Not many seem to be writing about this trend. Certainly almost no one sees this as a major factor influencing the 2011 business climate.

The author of the following article had the courage to publish the insights of Srinivas Thiruvadanthai regarding the medium term prospects for profit growth. From the article:

"... corporate earnings will be increasingly likely to disappoint markets in each of the next four quarters."

Abelson, Alan, 2010. September song. Barron's, Oct. 2.

I think that many folks have forgotten that the recent rise in profits was largely fueled by the indirect effects of stimulus, namely a turnaround in profits for financial institutions. These improvements are unsustainable especially in the face of non-existing support for a second round of stimulus spending.

There is no question that the stimulus program has distorted naturally occurring economic signals to the detriment of a speedy recovery. While government intervention no doubt has saved the financial system from Armageddon, the policy actions set the stage for slow economic growth and its consequences in terms of high unemployment. Though few things in economic science are certain, it is always true that the larger the government the slower the economic growth.

The first half of 2011 is not shaping up to be a period of high growth, rising stock prices, or lower unemployment. For the remainder of 2010 and all of 2011, the stock market might continue in a holding pattern.

I see little if any encouragement that unemployment will decline anytime soon.