Earnings Offer False Hope Of Economic Recovery

It's the earnings season when businesses report their first quarter results. News media headlines have trumpeted the growth in net income or profits at most firms. However, don't be deceived by the dunderhead news reporting. Upon closer examination, most of America's bellwether companies are improving profits by reducing head count, cutting operations and selling off under performing assets. That's hardly a prescription for growth. In fact, its a further sign that economic recovery is a long way off.

If you look beyond the profits, there are troubling signs at many firms. Revenues have fallen or remained flat when compared to the first quarter of last year. Considering that 2009 was an economic disaster, that's not a healthy indicator. When businesses expand, revenues rise along with payrolls and investment. The lack of growth underscores what many already suspect: the economic recovery has stalled.

Another sure way to assess the health of businesses is to look at investment. Are these companies plowing money into their operations to increase output for the future? The answer is a resounding "NO!" A quick check of most big publicly traded firms shows these businesses are hoarding cash. This indicates that these firms have no faith in a strong economic recovery anytime soon. If they believed that recovery was just around the corner, they would be pouring money into things like research, development, infrastructure and new equipment. It's not happening.

To be sure, there are exceptions to the first quarter trend. Apple, Inc. and Goggle both reported strong revenue growth of 49 percent and 23 percent, respectively. But neither is considered a bellwether company that accurately reflects the overall economy. They are high-tech players with proprietary products. A closer look at companies who depend heavily on consumer spending for growth reveals another story.

For example, Emerson Electric's sales were down seven percent. Jack in the Box sales fell 11.1 percent. Coca Cola's sales gained a paltry three percent, but all of the revenue growth came from overseas. AT&T's revenues were flat. KB Homes sales plummeted 14 percent. The list goes on and on. Firms that sell directly to businesses have suffered the same fate. For example, John Deere & Company revenues were down six percent. Caterpillar sales plunged 11 percent. IBM reported a five percent gain in revenues, but when adjusted for the impact of foreign currency, sales were flat. FedEx revenues dove 20 percent.

Wall Street is starting to notice. The indices have taken a hit in recent days. Until business revenues start showing signs of life and investment grows, don't expect the markets to rebound sharply. There may be temporary upticks, fueled by excessive optimism, but in the end, the experts will see earnings for what they are: a lot of bread, lettuce and tomato, but hardly any beef.