Ceos Sound The Warning

Every newspaper reader has a first stop, whether it's the sports page, the funnies or a gossip column. For business types, it's the front-page "What's News" summary of The Wall Street Journal--and as 2001 turns into an annus horribilis for corporate America, that section of newsprint is becoming more depressing than the obituary page. Last week, after tallying their second-quarter numbers, a host of blue chips--Compaq, Corning, Xerox--spilled their red ink down Wall Street. Even worse than the numbers were the forecasts, as industry leaders such as Microsoft warned that the third-quarter revenues won't be any prettier.

Economy watchers looking for the full half of the glass may soon be squinting to find it. We're not in an official recession, and unemployment remains historically low. Consumer spending, although slowing, hasn't tanked just yet. But the view from corner offices has rarely been this bleak. Corporate profits in the second quarter were down 18 percent from last year--the first time since the 1960s that number has declined by double digits without a recession, says senior equity strategist Joseph S. Kalinowski at Thomson Financial. The continuing bad news may spur the Federal Reserve to cut interest rates again, but observers worry that won't be enough to offset growing signs of weakness.

The most striking element of the latest corporate pronouncements is just how uncertain companies are about the future. CEOs are complaining of a lack of "visibility" (buzzword alert), which some observers say has never been worse. "I don't think visibility has been this low in 20 years, with people not being able to see what the next quarter or two is likely to bring to their business," says George Sard, CEO of Citigate Sard Verbinnen, a Wall Street consultant. Last week, when JDS Uniphase announced a $7.9 billion loss, it said the telecom industry is declining so rapidly that it can't give analysts any guidance about future quarters. Says Georgia State professor Lawrence D. Brown, who studies earnings estimates: "It's difficult to figure out turning points when you're in a free fall."

The murkiest outlook is in the tech sector, where profits fell 64 percent in the second quarter. At Hewlett-Packard, which announced 6,000 new job cuts last week, chief executive Carly Fiorina told analysts she gave up on a second-half recovery long ago--and she figures conditions will improve slowly at best. "I don't think we can call when a recovery will occur, but in our judgment it's not going to be a rapid hockey stick up and to the right," she says. Indeed, some observers worry that the continuing tech meltdown could infect the rest of the economy. Tech companies "lived through such a boom, with demand growing at astronomical rates... we don't know how deep the bust is going to be," says Richard Berner, Morgan Stanley's chief U.S. economist. He sees worrisome parallels to the real-estate industry, which became wildly overheated in the late 1980s and exacerbated the 1990 recession.

Investors won't have to wait until third-quarter announcements in October to see what lies ahead. Companies used to wait until earnings season to share bad news, or they whispered it to analysts ahead of time. Today, driven by new SEC rules and the desire to please the Street, companies are trumpeting their bad news via "pre-announcements" that rain down on investors on a weekly basis. These profit warnings hit record levels in the first quarter, and Charles Hill, research chief at First Call, says third-quarter warnings are already running ahead of that pace. Investors are becoming numb to companies' bad news. "You get to the point where, how much more can they disappoint?" says Texas stockbroker and radio commentator David Johnson, who calls the second quarter "a puke-fest." Until the economic news gets brighter, better keep a motion-sickness bag handy.