Slow down

Even GE can't beat sluggish global growth

General Electric has a growth problem. So do many other large US companies. On Friday, The US conglomerate and economic bellwether reported $36.4 billion in revenue in the third quarter. That was three per cent higher than the same period last year, but missed estimates, if only modestly. Throw in Chief Executive Jeff Immelt’s cautious outlook and it’s no wonder GE shares had fallen three per cent by (Friday) midday. Companies have done well trimming costs, but its economic growth that provides the real juice – and that’s in short supply.

Consider how few of them are beating consensus sell-side expectations: just 41.4 per cent of the 116 largest US companies that have reported quarterly earnings so far. That dismal figure is a repeat of the three months to June, when revenue took a decided turn for the worse. Compare that to the typical quarter when three in five companies top Wall Street’s reading of the tea leaves on top-line growth, according to Thomson Reuters data.

Foreign exchange fluctuations may have played a part in GE’s miss, but the trajectory of the global economy can’t be ignored. The International Monetary Fund downgraded its read on the global economy earlier this month, forecasting growth of just 3.3 per cent this year and 3.6 per cent in 2013 – meaning the planet could be flirting with recession. And this cheery prospect assumes European woes improve and America doesn’t fall off the fiscal cliff.

That will make it difficult for GE and others that derive half of their sales from overseas to drive revenue much higher than the three per cent Immelt sees for this year and next.

Since the 2008 debacle, US companies have been extraordinarily successful in nursing their balance sheets back to health. GE and others have worked hard to scuttle non-core businesses and pump up corporate America’s shock-absorbing cash cushions to nearly $2 trillion. Yet growth remains the irreplaceable ingredient needed to make profits sustainable. Investors are right to be sceptical. The S&P 500 ratio of share price to operating earnings is currently around 15, well below its quarter-century average of 19. Until the global economy finds its mojo, investors may be in for a bumpy ride.