(January 4) – “Many economists are expecting corporate profits to decline for the first time since 1998 and, they say, there is little the Federal Reserve’s rate cut can do about it — at least not for the first half of the year,” writes Steve Liesman in today’s Wall Street Journal.

“In fact, even though most economists and analysts aren’t yet forecasting a recession for the U.S. economy, some already are using the ‘R’ word to define the corporate-profit environment. If that happens, it would be the first so-called profits recession since 1990, according to First Call/ Thomson Financial, a company that compiles earnings estimates from analysts on Wall Street.”

” ‘The odds are pretty good we’ll have a profits recession,’ says Chuck Hill, director of research at First Call. He says current estimates call for earnings of companies in the Standard & Poor’s 500-stock index to have grown 4.3% in the fourth quarter of 2000 from a year earlier. But that figure, he says, will likely be downgraded. He adds that estimates for the first and second quarters of this year, while still positive, are likely to turn negative as more earnings warnings pile in.”

“Economists are sticking to their gloomy forecast even though the Federal Reserve Wednesday reduced short-term interest rates. In a surprise move, the Fed lowered the closely watched federal-funds rate, the rate charged on overnight lending, a half-percentage point to 6%. That brightens the outlook somewhat for profits, but observers say the rate cut comes too late to avert a profits downturn. ‘It takes nine to 12 months for the Fed action to have an impact,’ Mr. Hill says. First Call calculates operating profits, which exclude most one-time gains and losses. The government measures corporate profits as well but covers the entire business universe and includes extraordinary items; by this measure, the last profits recession was in 1998.”

“Some economists who track the government data are even more downbeat, with several predicting two consecutive quarters of declines, the unofficial definition of a recession.”

“William Dudley, chief economist at Goldman Sachs Group Inc., says total corporate profits probably declined 1.43% in the fourth quarter compared with the third quarter, and he estimates a 2.17% decline this quarter. ‘We see a very sharp deceleration and then a gradual recovery in corporate profits’ as rate cuts kick in and companies adjust, he says.”

“If anything, Mr. Dudley says, he is more inclined to lower his profit forecasts for the coming quarters because the Fed’s rate cut convinces him that the economy is actually weaker than he thought. ‘The effect of this rate reduction on profits won’t be meaningful in the short-term,’ he says.”