The Economist - USA (2020-11-07)

TheEconomistNovember 7th 2020 55

1

O

n the hustings, both Donald Trump

and Joe Biden promised to revive

America’s economy from its pandemic-

induced funk. Doing so will require a turn-

around for corporate America, which has

suffered a savage downturn. When the

occupant of the White House starts his four

year term in January, in what state will

American business be?

Some recent vital signs may look pro-

mising. America’s economy expanded at a

record pace of 33%, on an annualised basis,

in the third quarter. Total profits for the big

firms of the s&p500 index have surpassed

analysts’ expectations by roughly a fifth,

with 85% beating forecasts for the quarter.

Michael Wilson of Morgan Stanley, a bank,

calculates that revenues for the median

s&p500 firm rose by 1% year on year. Small

wonder that the Conference Board, a re-

search organisation, published a survey on

October 20th finding that its measure of

confidence of bosses at big companies has

jumped to 64 from 45 in the previous quar-

ter—a figure above 50 indicates more posi-

tive than negative responses.

Yet anyone tuning into big firms’ quar-

terly update calls with Wall Street investors

could not help but pick up the tentative

tone and frequent dour notes of executives.

Visa, a payments company, for example,

called the recovery “uneven”. Caterpillar, a

maker of industrial machinery, admitted it

is “holding more inventory than we nor-

mally would” because of the uncertainties

resulting from the pandemic. And a close

analysis of the figures suggests that the

corporate recovery is very patchy, with

some industries and smaller firms still in

big trouble. Meanwhile, corporate balance-

sheets are under strain, which could hold

back investment and lead to an eventual

rise in defaults.

America’s economic boom in the latest

quarter would be impressive had it not

come on the heels of a comparable decline

in gdpin the previous three-month period.

The economy remains 3.5% smaller than it

was at the end of 2019, reckons the Confer-

ence Board, and it is not likely to return to

its pre-pandemic level until the tail end of

2021 or possibly later (see chart on next

page). As for the large proportion of compa-

nies where profits exceeded expectations

this quarter, Tobias Levkovich of Citi, a

bank, is unimpressed: “Beating lowered

earnings expectations is not that great a

feat.” It is now clear that analysts were too

pessimistic when they pencilled in their

forecasts earlier in the year. He adds that

many firms managed to improve profits

not by boosting sales but by slashing their

expenses. The business outlook remains

“squishy”, he reckons, as “you can’t cost-

cut your way to prosperity.”

The more you peer into the numbers,

the more inconsistent the recovery looks.

One source of differentiation is where a

company’s customers are based. Jonathan

Golub of Credit Suisse, another bank, esti-

mates that the companies in the s&p 500

reported an aggregate revenue decline of

2.8% and a fall of 10.2% in profits in the

third quarter compared with a year earlier.

But he estimates that at American firms fo-

cused on exports profits plunged by over

14%, whereas those companies more reli-

ant on the domestic market suffered a drop

of less than 9%.

Size is another lens which reveals the

uneven recovery. Binky Chadha of Deut-

sche Bank argues that it is “a tale of two

The outlook for corporate America

Still ailing

NEW YORK

Look beyond the frothy stockmarket and booming tech giants and you will find

that much of American business is still in a sorry state

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