Economic Memo: In Divided Market, the Bigger the Companies, the Better They Fare

It’s tough to make sense of the economy these days.

The latest jobs numbers show hiring is down. Taxes are up, austerity reigns in Washington and consumers are skittish. Yet the stock market is defying gravity, marching ever higher in spite of it all.

Behind this seeming riddle lies a confluence of economic forces that is likely to continue to produce good times for the biggest American companies — and the stock market — even if growth, as expected, slows in the coming months.

By pumping hundreds of billions of dollars a month into the global economy, central banks like the Federal Reserve and the Bank of Japan have encouraged investors to put their money into stocks and other riskier investments, increasing their prices. Bullish traders now count on a supportive Fed chairman, Ben S. Bernanke, much as their predecessors did in the 1990s when Alan Greenspan held that job.

At the same time, American giants are benefiting from productivity gains and renewed growth in China and other overseas markets, allowing them to increase profits even if business at home remains lackluster.

“Big companies have found a way not just to survive but to prosper despite the broader economy and all the uncertainty,” said Howard Silverblatt, a senior index analyst at Standard Poor’s. “There’s a disconnect between them and the rest of the world.” Investors are also looking farther ahead, discounting what economists are calling a spring swoon, and focusing on prospects for healthier growth late this year and into 2014.

After finally achieving what experts estimate was a healthy 3 percent annual growth rate in the first quarter of 2013, the American economy is expected to slow to half that pace in the next two quarters as higher payroll taxes and automatic government spending cuts begin to bite.

Signs of that start-and-stop phenomenon have been mounting in recent weeks. After adding more than 200,000 jobs a month since November, the American economy created fewer than half that number in March, surprising some observers who thought the labor market had finally turned a corner.

And on Friday, new data on retail sales showed spending fell 0.4 percent last month while consumer sentiment sank to its lowest since last summer, according to a new survey by Thomson Reuters and the University of Michigan.

Despite that bearish data, the Dow Jones industrial average, made up of 30 of the biggest American companies, rose more than 2 percent last week to a record high, and stands within shouting distance of breaking the psychologically important 15,000 level.

Indeed, while the outlook among small-business owners remains stuck near recession levels, Wall Street is again expecting the largest companies to report strong results when they announce first-quarter earnings in the coming weeks.

That is especially true for the very biggest corporations. While analysts estimate profits for the 100 largest companies in the Standard Poor’s 500-stock index to rise 6.6 percent this quarter, earnings for the bottom 100 are expected to fall by 1.6 percent.

Of all the profits earned by the companies that make up the S. P. 500, 22 percent will come from the 10 largest companies, up from 18 percent in 2010, according to Mr. Silverblatt.

The same phenomenon is playing out among privately owned firms as well. Over the last three years, sales at companies with revenue of more than $50 million have grown by an average of 15.3 percent annually, compared with 8.5 percent annual growth at businesses with less than $50 million in revenue, according to Sageworks, a financial information company.

Among the smallest privately owned firms, the mood is especially bleak.

“It’s a bifurcated economy,” said William C. Dunkelberg, chief economist at the National Federation of Independent Business, which represents small-business owners. “Corporate profits are at a record, but all the data we have say small business is dead in the water.” Last week, the group reported that its Small Business Optimism index declined in March after rising for the previous three months.

Big companies also enjoy much easier access to credit than smaller companies, which still face wariness from banks nervous about lending to borrowers without sterling credit histories.

The fiscal tightening in Washington — primarily the automatic budget cuts imposed by Congress that are now taking effect at government agencies and the increase in Social Security taxes this year — is also poised to fall more heavily on smaller, domestically focused firms than on multinational giants.

Article source: http://www.nytimes.com/2013/04/15/business/economy/in-divided-market-the-bigger-the-companies-the-better-they-fare.html?partner=rss&emc=rss