Strong Corporate Profits Expected, a Traditional Trigger for Increased Trade Show Participation
Oceanside, CA – The U.S. economy that went missing for three months has been sighted in a few reports recently. Turns out it may have just been hibernating from the unusually harsh winter which is now beginning to thaw. This is a welcome relief for those who were beginning to wonder whether the economy’s dormancy was more than just weather related.
In February, consumers finally dug out of the snow and went shopping as retail sales rose 0.3%, the first gain in three months. The declines in January and December were worse than previously reported. Economists had expected only a 0.2% increase after snow and ice blanketed densely populated regions during the first half of the month. But in February, receipts rose in most categories, the Commerce Department said. "We see this as further confirmation that the underlying momentum in the economy remains quite favorable,” said Millan Mulraine, deputy chief economist at TD Securities in New York.
Economists expect retail sales to accelerate in the Spring as warmer temperatures and improving household finances usually unleash pent-up demand. "I do expect some pick-up in the Second Quarter. A lot of consumers are going to have some cabin fever," said Alan MacEachin, an economist at Navy Federal Credit Union in Vienna, VA. A strong bounce back in consumer spending should boost growth and buttress the Fed's resolve to unwind its monthly QE program by year end, said Frank Chow, chief economist for Trade Show Executive Media Group.
Employment also showed signs of awakening in February as the economy added 175,000 jobs. The gain was significantly above the consensus forecast of 140,000, noted Chow. Moreover, the number of new jobs added in January and December was revised higher by a total of 25,000. “The jobs gain was the biggest in three months,” said Chow, “countering a recent slew of weak economic data that had raised questions about the pace of the recovery this year.” The Labor Department said hiring was strongest in professional services, education, restaurants and bars.
Besides the rising jobs number, the average hourly wages grew a healthy 9 cents to $24.31, having advanced 2.2% over the past 12 months. Some economists suggest a continued climb in wages is evidence of companies paying more to attract good workers. “It is typically an early sign the labor market is getting stronger,” noted Chow. “Conditions aren’t great, but they’re continuing to improve,” said Neil Dutta, head of economics at Renaissance Macro Research. Economists say it may take another month or two to get a better read on the economy’s health.
Hiring Slows in Health Care Field
Yet the latest jobs report also contained some worrisome signs, Chow pointed out. The unemployment rate ticked up to 6.7% from 6.6% due to 264,000 people returning to the labor force looking for a job. “Hiring in the health care industry has sharply declined and the number of hours that people work each week fell to the lowest level in three years,” he said. The decline in hours worked may largely be due to poor weather, but the average workweek is still below the post-recession peak achieved in November, Chow noted.
The pace of hiring is also a lot softer compared to last Fall. The economy added an average of 131,000 jobs in the past three months, compared to an average of 225,000 from September through November. Furthermore, the number of people out of work at least six months rose by the largest number in almost two years, he said.
The Federal Reserve said U.S. factory output rebounded strongly, up 0.6% in February after widespread storms caused a steep production drop-off in January. Manufacturers produced more autos, home electronics and chemicals. The rise was triple the increase that economists had expected, Chow said.
Geopolitical Concerns in Russia and China
Of course it wouldn’t be normal if we didn’t have something ominous brewing on the horizon, said Chow. Outside the U.S., executives should monitor developments in Russia and China. “The dispute with Russia over its seizure of Crimea has led to the U.S. and Europe announcing sanctions; however, this may devolve into a war of reciprocal trade sanctions that would seriously heighten global uncertainty and harm economies,” said Chow. The likely outcome would be higher oil prices and a risk of another recession. Meanwhile, China’s rapid pace of growth appears to have slowed in what would also be a setback for the global economy, he noted.
In China, recent figures reveal a weakening expansion in the $9 trillion economy. February data showed exports unexpectedly plunged the most since the global financial crisis; producer-price deflation deepened; and credit growth fell short of estimates. Moreover, data showing China’s industrial output, retail sales and investment cooled more than economists estimated in January and February, said Chow. The slowdown is making it harder for Chinese borrowers to repay their debts. Nonperforming loans increased by 28.5 billion yuan ($4.7 billion) in the Fourth Quarter to 592.1 billion yuan, according to the banking regulator — the highest amount since September 2008. Since 2007, the number of companies with debt twice their equity has surged 57%. “This is the official report,” said Chow, “and many analysts believe the magnitude of troubled loans is far greater.”
Several economists at major banking institutions have cut their forecast for Chinese growth, fueling speculation the nation may not meet its 7.5% expansion target for 2014. To combat the weakness, China will invest more than 1 trillion yuan ($162 billion) to redevelop shantytowns. Leaders have pledged to speed up urbanization as they try to rely more on domestic consumption for growth and give markets a bigger role in the world’s second-largest economy. Premier Li Keqiang said in March that tens of millions still live in shantytowns, which are areas of dilapidated housing where poor factory workers often live. If China fails to meet its 7.5% target, countries heavily dependent on commodities trade will suffer, potentially throwing some into recession.
The two geopolitical concerns contributed to a decline in the University of Michigan/Thomson Reuters Consumer Sentiment Index in March, which hit the lowest level in four months. The gauge fell to 79 from a final February level of 81.6. So despite the recent good economic reports, consumers feel gloomier about the economy. “We believe that geopolitical concerns continued to weigh on consumer outlooks during the survey period,” said Gennadiy Goldberg of TD Securities. The data shows the fall in confidence was largely centered in the future expectations component of the survey. “We believe this underscores the potential for the index to rebound substantially once Crimean worries begin to fade and better economic data begins to bolster confidence in the outlook,” he said.
Strong Corporate Profits Bode Well
“If trade show executives are still concerned about the economy, the recent estimates of corporate earnings and revenues should allay these doubts for the near-term,” Chow said. Corporate profits were at an all-time high at the end of 2013, reflecting the resiliency of the corporate economy. In 2013, earnings for the S&P 500 were estimated to have increased at 6.2%, with the inclement Fourth Quarter recording an impressive 9.8% bounce. This year, the S&P 500 earnings are currently expected to grow 8.7%. Earnings will start very slow in the First Quarter but are projected to jump to double digits for the Third and Fourth Quarters.
Goldman Sachs, for example, expects 5.1% growth due to general economic improvement. Trade Show Executive does not track profit growth in the trade show industry, however top line growth, based on a same-show comparison, is forecasted at an average 7.5% for 2014, based on the input of Trade Show Executive’s Exposition Forecasting Board.
Based on the historical relationship between the U.S. economy and profit, some economists estimate that a pickup in economic growth could add between three to five percentage points to S&P profits. With the anticipated snapback in consumer spending, increased profits could come from increased sales rather than from cost-cutting to boost margins as in recent years. “I believe this relationship also extends to the connection between corporate profits and trade show growth, especially for the metrics related to net square footage, exhibitors and revenue,” said Chow. Most economists forecast GDP to expand at a tepid 2% annual rate in the weather-beaten First Quarter, a slowdown from the Fourth Quarter's 2.4% pace, but expect stellar results in the Second Quarter.
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