Recession hits U.S. corporate profit; will overall economy be next?

U.S. corporate profits are in a recession, and the entire economy might not be far behind.

Slower sales and higher costs for energy and labor are forcing companies like Bear Stearns and Pitney Bowes to reduce spending and hiring. Their efforts to keep earnings from eroding even further raise the risk that the U.S. economy, already weakened by the steepest housing slide since 1991, could shrink sometime next year.

"The earnings recession has already arrived," said David Rosenberg, North America economist in New York for Merrill Lynch. "We are going to see an economic recession in '08."

Corporate profits, as measured by the Commerce Department, fell at an annual rate of $19.3 billion in the third quarter from the second, as domestic earnings dropped by $41.2 billion.

The fourth quarter may be an even bigger bust.

"In the third quarter, the tide shifted, and for the worse," said Joseph Quinlan, chief market strategist for Bank of America. "The domestic profits squeeze is in its early stages and will be severe enough to overwhelm strong foreign earnings."

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