BW Online 1April 26, 20011 Greenspan's Preoccupation with Profits BggisterlSubscribe HomEl Page 1 of 3 How many inves1 bankers do you ~ online Business\Veek BW IDAIU' !!;t.u.;=:;;G.="Z=I;;;,NIi~==",)l iElR I!EFING • nAIl'\' IlRIHING Today's New~ News Archive Reuters TOR News MarJiet Update 86,% OFF COVER PRICE ~ubscribeJo BW Contact Us Advertisiog Confereoces eermissions_Ilc~~jJJiOL~ .MgXk®2!g.QSt Search II_D_a-=iIY_B_r_ie_fin~g~ __ ElI, _ IIT£.cHNOLOGT Greenspan's Preoccupation with Profits The Fed is wagering that it can ignore inflation while using rate cuts to OOL\JMNlS help boost earnings and avoid a recession. But there are risks FORUtliS _! KEWS'L~RS I For the past five years, Federal Reserve officials have been ...- Printer-Fr:i?ndly Version r"""---''''"--~=---=''"'. regularly contacting Thomson Financial equity strategist Joseph 'i1ERS!l)IIAI(. flllANlCE /" E-M_a_ilTh_is __St_o_r"_ ~ c.- -cc.. S, Kalinowski for consensus earning forecasts by Wall Street s. [ ;SEA.R~ & ,!JR9W~_E analysts, But the contacts have become much more frequent of SP.ECIAL Rep.ORTS late. With earnings, and earnings expectations, plunging, they're • Find More Stories Like This T;Q0LS lit S1::0PlEOO.lIiI!:GS checking with him at least once a week to get the latest news on 'l!'lIllEOVIE!N~ the profits front. Of particular concern to the Fed officials, according to Kalinowski: the steep drop in high-tech companies' profits. "They, like everyone else, have been amazed at how far those earnings have come down," the strategist says. APRIL 26, 2001 NEWS ANALYSIS By Rich Miller It's no mystery why Greenspan & Co. is so worried: Pinched profit margins are a threat to the economy as far as the eye can see, In the near term, the Fed is concerned that the profit squeeze will prompt companies to cut investment and pare payrolls even further, tipping an already weak economy into recession. PERILS AND PITFALLS. The Fed is also worried that the earnings slump will sock the stock market and sap consumer spending via the so-called wealth effect. In the longer run, the Fed frets that reduced business investment in computers and other efficiency-enhancing equipment will undermine the strong productivity growth that has been the hallmark of the New Economy. In the latest bit of bad news on the investment front, the Commerce Dept. said on ApI. 25 that core capital-goods orders fell in March, the fifth time in six months, But the Fed's focus on plumping up profits carries some risks. If companies try to rebuild earnings by raising prices, the Fed won't only have an economic slowdown to worry about -- it will be faced with an inflation problem as well. "It's not hard to construct stagflation scenarios in which price pressures continue to rise in the face of weak business conditions," says Louis Crandall, chief economist at consultants R.H, Wrightson & Associates. By aggressively cutting rates, Greenspan is betting that the New Economy is alive and kicking and can insulate the U.S. against any inflation outbreak. As far as the Fed chief is concerned, Corporate America hasn't even begun to exhaust the many productivity-enhancing and profit- making opportunities the New Economy affords. LONG ON OPTIMISM. Take corporate purchasing managers at the nation's manufacturing companies: A December survey by the National Association of Purchasing Management found that 95% of the managers contacted felt they could reap further big gains in efficiency from the application of technology, As long as companies don't overreact to the current earnings squeeze and indiscriminately slash investment, Greenspan believes the long-term outlook for the growth of productivity and profits is bright. Stock market analysts seem to agree. Yes, they've drastically cut their short-term earnings forecasts as the economy has slowed sharply. But they remain surprisingly sanguine about the longer-term outlook, According to Kalinowski, Wall Street analysts expect operating profits of companies in the Standard & Poor's 500 to rise on average by about 16% per year over the next three to five years. That's down only slightly from a high forecast of 18.7% growth in August of 2000 and compares favorably with this year's expected 2.3% drop. http://www.businessweek.comlbwdaily/dnflash/apr2001lnf20010426_005.htm fIUt':.1I DJIA Nasdag S&~Q.QQ ;?_Q.Yl.J3.Qo.Q ~reatS£J...Q.ru .Launch PJm Stock LookL I-- Enter name 6/11101