Earnings in the third quarter were generally better than had been expected, but there are growth concerns for the fourth quarter and the first two quarters of 2007. The growth concerns stem from fears of an economic slowdown in the United States, as Michael discussed in PROFIT CONFIDENTIAL on Monday.
The third quarter GDP of 1.6% was below the estimated 2.1%, representing the second consecutive quarter of sequential decline. GDP fell from 5.6% in the first quarter to 2.9% in the second quarter and then to 1.6% in the third quarter. The third quarter GDP was well below the third quarter 2005 GDP of 4.10%.
While the slowdown is yet uncertain, the trend clearly supports one. Moreover, in the Bush administration’s bi-annual projection (put together by the Council of Economic Advisers, the Treasury Department and the Office of Management and Budget) lowered the GDP growth forecast for 2006 through 2008, blaming the housing slump for the decline. As I’ve discussed in recent editorials, lower housing prices translate into lower overall wealth. When housing prices fall, consumers may cut back on spending, which thereby impacts economic growth.
Estimates call for the U.S. economy to grow by 2.9% in 2007, below the prior forecast of 3.3% and well below GDP growth in the past several years. In 2008, GDP is predicted to grow 3.1%, just below the previous forecast of 3.2%.
My view is that, unless corporations control their cost side, we could see a squeeze on margins and profits heading into 2007, which will add some pressure to stocks as we move into the New Year. The market is clearly discounting in plenty of good news at this time, including strong earnings growth in the first to third quarters of 2006, but what materializes in the fourth quarter could dictate trading into the New Year.
As we head towards the year-end, you may want to realize some winners and losers and adjust your books for 2007.