Mideast Crisis Dashes Hopes for Rebound In Corporate Profits in the Second Half
The likelihood of a second-half rebound in corporate profits all but died with Iraq's invasion of Kuwait.</br></br>Many U.S. manufacturers had expected 1990 profits to be the mirror image of 1989 results, starting out slowly as companies completed the inventory reduction begun in late 1989, but then improving noticeably in the second half. The oil crisis makes it more likely that profits will continue to slip until sometime in 1991.</br></br>Even optimistic economists who don't expect higher oil prices to trigger a recession say after-tax corporate profits will decline in 1990 for the second consecutive year. Richard D. Rippe, senior vice president and chief economist with Dean Witter Reynolds Inc., is looking for a 2% to 3% dip from 1989's $167.1 billion.</br></br>Among the more bearish forecasters, A. Gary Shilling, New York economic consultant, says the crisis is "the last nail in the coffin of this expansion." He's forecasting a 12% to 14% profit drop for 1990. David Bostian, managing director and chief economist for Jesup, Josephthal & Co., believes "we were in a recession before the invasion occurred." Piling on the Middle East crisis will produce some "downright scary" earnings reports because of "the downside leverage of high corporate debt."</br></br>Even before Saddam Hussein plunged across the border, the profit outlook was less favorable than manufacturing executives had expected during the spring. Demand was a little weaker than anticipated, triggering discounting on products ranging from tires to machine tools and preventing producers of other items from raising prices to pass through higher costs. And costs rose a little more than had been budgeted.