More Bad News For Obama: Slowing Profits

One of the few favorable economic trends may be coming to an end.

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For all of his supposed hostility toward business, President Obama's tenure in the White House has coincided with a remarkable string of profitability for corporate America.

Until now.

 [Slideshow: Obama's crackdown on corporate America.]

The same forces that are depressing economic growth finally seem to be cutting into profits at big firms that have seemed largely immune to debt problems in Europe, persistently high unemployment in the United States and other nagging problems. Perhaps more importantly, a number of big companies are downgrading their outlook for future profits. If they're right, the slowdown in corporate profits could intensify at a vulnerable time for Obama, with the next batch of numbers due on the eve of the November elections.

Most big companies are still profitable, but a number of bellwether firms have been falling short of expectations, which suggests the overall economy is even weaker than skeptical analysts have thought. Starbucks, McDonald's, Dow Chemical, Amazon and even Apple all fell short of analysts' earnings estimates for the second quarter, with some executives warning that future earnings may be disappointing as well.

Just a few weeks ago, forecasters expected third-quarter profits for firms in the S&P 500 index, which will start rolling in around mid-October, to rise by three percent or so, according to a survey of forecasters by Thomson Reuters. That would have been a respectable showing unlikely to cause much stress in financial markets. But analysts have turned sharply bearish, now predicting a 0.1 percent decline in third-quarter profits, which could augur a turbulent autumn for stocks and an even weaker hiring environment. Investors have been hoping that more monetary stimulus from the Federal Reserve and the European Central Bank will prop up stock values, but that medicine, if administered, could easily wear off by Election Day.

[See what will happen to your taxes in 2013.]

A slowdown in profits would interrupt one trend Obama can genuinely boast about. Since bottoming out during Obama's first year in the White House, corporate profits have risen consistently and been one of the few bright spots in an otherwise bleak economy. Big, multinational companies have been able to offset the slowdown in Europe and the United States by tapping into faster-growing developing economies such as China, India and Brazil.

Aggressive cost-cutting—including lots of layoffs—has allowed companies to remain highly profitable even if revenue stagnates or declines. And a global footprint allows many firms to shift their operations from region to region in the most efficient way.

But some problems are becoming too big to escape. McDonald's and Dow, for example, both cited slowing sales in Europe—much of which is in a recession—as a big contributor to weak earnings. Amazon and several other companies said a strong dollar, which is largely due to the weakness of the euro, cut into the profitability of overseas operations and pushed earnings down.

[See how Washington is wrecking the economy, Part 3.]

Many companies also believe that worries over the federal government's "fiscal cliff"—a huge set of tax hikes and spending cuts that will go into effect in 2013 if Congress can't compromise on a way to avoid them—are already depressing spending and confidence in the U.S. market. If Congress botches that, it could single-handedly cause a recession. With confidence in Congress's competence at record lows, many companies are preparing for the worst.

Obama's re-election probably hinges on a few distinct factors: Unemployment, the stock market, the price of gas and whether Americans feel like things are getting better or worse. Corporate profits aren't something most voters pay attention to, but they do directly determine whether companies are comfortable hiring and spending money, or more inclined to hunker down. Unfortunately for Obama, a bunker mentality may be taking hold, in case 2008 happens all over again.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.