Commercial profits reported for Q1 turned out to be mixed, while earlier predictions have proven to be excessively pessimistic. However, Wall Street posted losses on Thursday, as lackluster corporate sector performance during the period supported allegations of an imminent recession.
"Earnings have been decent, outperforming, but outperforming expectations that have been dramatically lowered," Charlie Johnson of Philadelphia-based Greentree Brokerage Services said. "So it's like a shell game."
US telecom provider Verizon suffered losses due to an employee strike, which disrupted its normal functioning. Alphabet Inc., the owner of Google, reported below-expectations Q1 profits, while Microsoft's quarterly report also frustrated investors. On the average, S&P-listed companies are forecast to post a 7.2% in Q1 earnings, followed by a 2.6% decline in Q2, bringing the total to four consecutive quarters of corporate losses. Meanwhile, US economic history has demonstrated that merely two consecutive quarters of losses are an indication of a looming recession.
"We think the market has already discounted the weak first quarter and possibly even some negative earnings in the second quarter," Paul Christopher of Wells Fargo Investment Institute said. "If the second quarter were [to be] as disappointing as the first quarter, you'd see another downturn."
Weak corporate performance falls in line with dismal governmental figures. Previously, the Commerce Department said Q1 wholesale inventories dropped 0.5%, worse than previously expected, and indicating a greater weakness in personal consumption, the key to US growth. Subsequently, JPMorgan Chase & Co. estimated US Q1 growth at an annualized 0.2%, while the British bank Barclay's lowered their forecast to 0.3% from 0.4%, and Goldman Sachs downgraded their outlook to 0.9% from 1.2%.
The US government's GDP report is due on 28 April.
"The labor market continues to improve. If the apparent slowing in GDP in the first quarter was truly a sudden change in trend, we should have seen something happen in claims by now," Jim O'Sullivan, of Valhalla, NY-based High Frequency Economics said.
Initial unemployment filings have held steadily below 300,000 for 59 weeks. However, as labor participation rates decline, this hardly constitutes comprehensive evidence of the job market's health. According to a report by the Federal Reserve Bank of Philadelphia, its business conditions index dropped into the negative in early Q2, to —1.6 in April from 12.4 in March.
US consumer spending might accelerate on labor market confidence, yet, negligible gains in salaries and wages, along with a lingering threat of disinflation are restraining the US growth potential.
That said, the US can still avoid a recession by implementing a major policy shift, including supply-side fiscal stimulus and the prudent inflation-adjustment of monetary policies. In other words, it takes spurring business confidence by lowering taxes and easeing bureaucratic regulations, allowing private sector enterprises to create competitive jobs at home. Meanwhile, new hikes in borrowing costs are unnecessary and harmful, as each time they push the dollar higher, exacerbating disinflationary pressures.