03/29 13:55 U.S. First-Quarter Profits Have Biggest Decline in 10 Years By Heather Landy

New York, March 29 (Bloomberg) -- U.S. corporate profits had their biggest decline in a decade this quarter as consumers and businesses reduced spending, posing a threat to the record 10-year economic expansion.

With two days left in the quarter, first-quarter earnings for Standard & Poor's 500 Index companies are forecast to fall 8 percent, according to analysts surveyed by First Call/Thomson Financial. That would be the first year-to-year decline since 1998's third quarter and the steepest since 1991.

Intel Corp., Gateway Inc., Delta Air Lines Inc. and New York Times Co. are among the 150 S&P 500 companies that cut first- quarter estimates, as consumer spending rose less than half as fast in February as the prior month and businesses sliced travel and advertising budgets. Computer-related companies were hit hardest, with analysts projecting a 35 percent earnings drop for the industry.

``It's the exact reverse of the cycle we had going in the late 1990s,'' said Christopher Low, chief economist at First Tennessee Capital Markets in New York. ``There's been a collapse in capital spending as a result of the bursting of the Internet bubble and the sudden realization that the pace of technology spending has probably been too rapid over the last few years.''

Three reductions in interest rates this year by the Federal Reserve may help rekindle growth as it becomes cheaper for consumers to finance new homes, cars and other goods, analysts said. Any lift may take another six to nine months as the lower rates to work their way through the economy.

Second-Half Rebound

Corporate earnings are expected to drop 6 percent in the second quarter before rising 1.9 percent in the third, and 12.9 percent in the fourth, First Call research analyst Ken Perkins said. That would result in a gain of 0.3 percent for the year, the smallest gain since 1991.

The prospect of two straight quarters of declining earnings has shaved more than 8 percent off the Dow Jones Industrial Average and 20 percent from the Nasdaq Composite Index this year.

``For all the talk of the new economy, investor psychology is still very much old economy,'' said Joe Kalinowski, an equity strategist at IBES International Inc. ``We can't keep hearing about profit shortfalls every day.''

Many analysts say the economy probably won't fall into recession, citing a jump in consumer confidence this month, an unemployment rate hovering near the lowest level in three decades and rising home sales.

A recession is considered two consecutive quarters of declining gross domestic product. U.S. GDP probably rose at a 0.7 percent rate in the first quarter, according to a Bloomberg News survey of analysts. That would be less than the fourth quarter's 1 percent pace, the slowest in 5 1/2 years.

'A Lot of Pressure'

``Cyclical industries, and that includes technology, will be under a lot of pressure with GDP growth close to zero,'' Salomon Smith Barney Inc. economist Steve Wieting said.

Gateway, Compaq Computer Corp. and Dell Computer Corp. are firing a combined 9,100 workers as demand for personal computers drops. All three PC sellers reduced quarterly profit estimates.

The demise of start-up Internet sites and telephone companies resulted in canceled orders for network components and communications equipment. Cisco Systems Inc., Lucent Technologies Inc. and Nortel Networks Corp. have lowered first-quarter targets for sales or earnings.

In turn, manufacturers of the chips that run communications equipment have been hurt. Broadcom Corp., Applied Micro Circuits Corp., Vitesse Semiconductor Corp. and others found that big customers such as Cisco had excess inventory of their products.

Profits to Losses

Overall, analysts expect a 41 percent drop in profits for semiconductor manufacturers, and a 157 percent plunge -- which would mean losses -- for communications-technology companies, according to First Call.

Corporate cost-cutting has resulted in slower advertising growth for Tribune Co., Dow Jones & Co., E. W. Scripps Co. and other publishers. Internet media businesses such as Yahoo! Inc. are especially vulnerable because many of their online advertisers have shut or scaled back marketing spending.

In the airline industry, eight of the 10 biggest carriers, including United Airlines parent UAL Corp. and American Airlines owner AMR Corp., are expected to show first-quarter losses.

Customers paying high fares are demanding more perks, while many businesses are spending less on travel. Labor unrest and faulty hedging against jet-fuel prices exacerbated the losses at some airlines. Of the 10 largest carriers, only Southwest Airlines Co. and Continental Airlines Inc. are expected to show a profit.

Auto Industry

For the auto industry, March's unexpected rise in consumer confidence, the first increase in six months, came too late. The top three U.S. automakers slashed car production by 21 percent in the first quarter to account for falling demand.

General Motors Corp., Ford Motor Co. and DaimlerChrysler AG, facing bulging inventories of cars and trucks on dealer lots, also used costly incentives such as low-rate financing to boost sales and fend off foreign rivals. Profit is expected to drop at all three automakers.

Fed officials say that companies are working through their inventories, preparing the way for rebound latter this year.

Pharmaceuticals distributors and energy companies are bucking the trend.

AmeriSource Health Corp., Cardinal Health Inc. and other drug wholesalers are expected to boost first-quarter profits by an average of 18 percent, helped by demand for new medicines and the growing population of older Americans.

Earnings at energy companies were buoyed by higher oil prices and wider profit margins. Sunoco Inc., one of the largest fuel sellers in the U.S. Northeast, said this month that it would top analysts' earnings estimates, as did oil refiner Valero Energy Corp. and oil and gas producer Unocal Corp.

These bright spots, along with rising consumer confidence and low unemployment, may help sustain the economic expansion, analysts said.

Even if that is the case, waning profits and declining stocks may produce ``recession-like effects,'' IBES's Kalinowski said.

``It's like driving a car 90 miles per hour and slowing down to 40 miles per hour,'' he said. ``Even though you're still going pretty fast, you feel like you're crawling.''

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-- Carl Jenkins (somewherepress@aol.com), March 29, 2001