Corporate Earnings And The Economy

What do corporate earnings say about the real economy? This week, two-thirds of the S&P 500 will release their results for the third quarter. Grim warnings about future prospects sent the Dow into another steep drop Wednesday.

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MICHELE NORRIS, host:

From NPR News, this is All Things Considered. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block. Stock markets around the world fell today, and Wall Street was no exception. The Dow lost about 500 points. As they say on Wall Street, the markets are retesting their lows, lows hit just last week. NPR's Jim Zarroli is here to expand on that explanation. And Jim, this huge drop coming alongside some pretty lousy corporate earnings reports.

JIM ZARROLI: Yeah, this was another day when stocks were down, you know, throughout much of the day, and then just really fell a lot faster in the hour before the market closed, which is getting to be something of a pattern.

BLOCK: Yeah, we've had this conversation before, I think.

ZARROLI: Yes, we certainly have. A lot of it today has to do with something we've also talked about before, which is the continuing turmoil in the economy. People are afraid we're heading into a global recession, worried about demand falling, and not just in the developed world but in emerging markets. There's a lot of concern right now that Argentina might default on some of its debt. And so prices have been falling around the world.

And it's really been aggravated this week by just a bunch of disappointing corporate earnings reports, as you said, from some big and important companies. Some of them, like McDonald's, have done well. But a lot of others say they made, you know, just much less money than investors expected during the last quarter.

BLOCK: What else are they saying about those disappointing reports?

ZARROLI: Well, one of the interesting things is that, you know, companies usually give guidance about the future, about what they expect earnings to be, you know, in the months to come. But a lot of them now are just refusing to do that. They're saying things are too murky. And it's just a sign of how very uncertain things are right now. But as for the last quarter, you know, a lot of them have just been pretty pessimistic. Merck, DuPont, Boeing, they've all seen their profits fall - bank stocks down.

Look at a company like Yahoo. It has seen a big drop in ad revenue. Yesterday, it said it was cutting 1,500 jobs. Yahoo is one of those, you know, big, bellwether Silicon Valley companies, you know. It doesn't lay people off. It throws stocks options at them to keep them. And yet now it's having to get rid of workers.

BLOCK: Jim, we've been talking a lot on the program about troubles in the credit markets lately, and capital injection to the banks was supposed to help with that. Is there any sign that this credit freeze is unfreezing?

ZARROLI: Well, that's one of the interesting things. We are seeing a steady easing in the credit market. The London Interbank Offered Rate, which has a big impact on interest rates in this country, keeps ticking down. This is very good for the economy. It makes it easier to borrow. But this has just been completely swamped by all the concern about economic growth.

BLOCK: And another big drop in oil prices today, Jim. What's behind that?

ZARROLI: That's another thing. It's the kind of thing that ought to make the stock market very happy. We've seen a really amazing drop in oil prices, down 7 percent today. Oil prices right now are just, you know, at much less than half of their peak, which was $147. That was the price they hit over the summer. We're now - oil prices are now at their lowest level since June 2007. Once again, it's the same old story. This is being driven by fears about a global recession, fears that demand will fall. And this is having an impact, really, on commodity prices across the board, but it's especially having an impact on oil.

BLOCK: OK, NPR's Jim Zarroli in New York. Jim, thanks so much.

ZARROLI: You're welcome.

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