Analysts: Crisis likely to worsen

WASHINGTON (AP) — A flurry of better-than-expected bank earnings reports this week, coupled with some tentatively encouraging economic data, suggest the economy and the financial system might not be quite as sick as many had believed.

Or are they?

Many analysts say it’s too soon to declare a recovery on the horizon. Instead, they warn, the economic crisis is likely to worsen in the months ahead.

“I don’t think we should oversell these flickers of improvement,” said Brian Bethune, an economist with IHS Global Insight. “An actual recovery is still several months into the future — it’s not imminent.”

But the stronger-than-anticipated earnings Friday from Citigroup Inc. and General Electric Co. — among the most beleaguered companies in their industries — also buttress the idea “that just maybe we can see some light at the end of the tunnel now,” said Mark Vitner, senior economist at Wachovia Corp. He projects an end to the recession toward year’s end but high unemployment well into 2010.

Citigroup lost money in the first quarter, and General Electric’s profits fell, but both beat Wall Street’s expectations. Their performance is being dissected for signs of where the economy might be heading.

Citigroup, which has been the weakest of the large U.S. banks, reported its smallest loss since 2007. And before paying dividends, which were tied to the government’s $45 billion investment in Citigroup, it earned $1.6 billion.

That report followed surprisingly solid earnings from JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co. earlier in the week.

Some analysts, though, say the earnings announcements are concealing the depth of the financial industry’s woes.

Goldman Sachs changed its calendar so a $780 million loss in December wouldn’t drag down its reported $1.81 billion earnings for the quarter. Wells Fargo minimized possible future losses on its purchase of failed bank Wachovia. And thanks to a recent rule change, many banks were able to pump up the values of the toxic assets at the heart of the credit crunch.

The rule change is “like a gain that goes right to their bottom line,” said Lawrence Brown, an accounting professor at Georgia State University.

Looming over the banks’ financial results is uncertainty over “stress tests” that regulators are running on the 19 largest financial institutions. With the results expected to be announced May 4, investors still don’t know how much information will be made public. Even faint reports of trouble could threaten the industry.