(November 8) – “It may be time for investors to bid farewell to those fat, double-digit earnings gains to which they have become accustomed,” writes Steve Liesman in today’s Wall Street Journal.

“According to securities analysts surveyed by IBES International, per-share operating profits for the Standard & Poor’s 500 companies are estimated to grow just 9.3% in the fourth quarter. Although that growth rate would remain robust by historical standards, it pales in comparison to the rapid 21.6% average growth over the past five quarters.”

” ‘It’s slowing down to more normal levels,’ said Joe Kalinowski, equity strategist for IBES. Although he doesn’t believe the economy is ‘entering a corporate profits recession,’ he does believe companies will find it difficult to continue the heady growth of the past few years. Hardest hit, he says, will be basic industries like chemicals, building materials and forest products, as well as the transportation sector.”

“Economists and analysts have been watching corporate profits more closely than usual this year to see if and when rising energy costs, a tight labor market and changes in consumer spending would hurt corporate balance sheets.”

“Oil prices, for example, have risen 42.9% over the past year. Compensation at some companies is rising so rapidly that it is offsetting strong gains in productivity. In a recent report, economists at Morgan Stanley Dean Witter note that compensation growth rose at a breathtaking 6.4% annual rate in the third quarter and by 5.1% over the past year.”

“Meanwhile, tough competition, especially from abroad, means that companies can’t easily pass along their higher costs to customers. The result, of course, is a classic profit squeeze.”

“In previous business cycles, corporate profits, which make up about 12% of national income, didn’t matter very much to economists, because profits were not considered a major factor in determining economic growth.”

” ‘There is no scenario in the postwar period where economic recession was caused by a profit recession,’ said Ed Yardeni, chief investment strategist at Deutsche Banc Alex. Brown in New York. They tend to be ‘innocent bystanders’ in recessions caused by other reasons.”