Recession in 2008? – Heck of Way to Start Monday

Businesses are becoming increasingly pessimistic about 2008. Basically, falling profit, less capital spending, and more layoffs are going to be the rule for Q4 and at least the first part of 2008. So the corporate earnings recession is here. With a recession in corporate earnings, housing, auto sales, computer technology, etc. and with problems in the job market, the question becomes: how long can the consumer hang-on. Text in bold is my emphasis. From Bloomberg:

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

``The earnings recession has already arrived,'' says David Rosenberg, North America economist for Merrill Lynch & Co. in New York. ``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 drag from sagging U.S. sales and huge writedowns offset robust earnings abroad, fueled by the weak U.S dollar. The fourth quarter may be an even bigger bust.

``In the third quarter, the tide shifted, and for the worse,'' says Joseph Quinlan, chief market strategist for Bank of America Corp. in Charlotte, North Carolina. ``The domestic- profits squeeze is in its early stages and will be severe enough to overwhelm strong foreign earnings.'' . . . .

. . . . Profits for the Standard & Poor's 500 companies fell almost 25 percent on a per-share basis in the third quarter, the biggest year-over-year decline in almost five years. David Wyss, S&P's chief economist, expects their earnings to fall as much as 30 percent in the fourth quarter as companies take more writedowns for bad investments. Excluding such extraordinary items, operating profits may fall as well, he says.

Even if profits have peaked, that doesn't mean the economy is about to turn down, says Steven Wieting, managing director of economic and market analysis at Citigroup Global Markets Inc. in New York. In the last expansion, profit margins began contracting in late 1997; there was no recession until March 2001.

What's troubling this time is that much of last quarter's damage came in the financial sector, where operating earnings fell 25 percent, as banks and brokers were hurt by losses from subprime mortgages and related investments. Analysts' estimates compiled by Bloomberg indicate the industry's profits this quarter may decline more than 25 percent.

The plunge in financial profits is a triple whammy for the economy as banks and other institutions pare payrolls, cut capital spending and become stingier with loans.

Bank of America, JPMorgan Chase & Co., Bear Stearns, Citigroup Inc., Lehman Brothers Holdings Inc. and Morgan Stanley have announced some 25,000 job cuts so far this year. Gustavo Dolfino, president of New York executive-search firm Whiterock Group LLC, said in a Nov. 20 interview he expects them to fire thousands more. . . .

. . . . Claims for unemployment benefits jumped to a nine-month high in the week ended Nov. 24. Economists polled by Bloomberg forecast that data to be released Dec. 7 will show payroll growth slowed to 70,000 in October from 166,000 in September, while the jobless rate rose.
``We see a significant slowdown in the growth of jobs and equipment spending in 2008,'' says Allen Sinai, chief global economist for Decision Economics in New York.

Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, fell 2.3 percent in October, the most since February, according to Commerce Department figures. . . .

. . . . . The biggest hit to the economy from fading financial profits may come from tighter lending standards. The Federal Reserve reported last month that banks were making it harder for businesses and consumers to borrow. Analysts including Sinai expect terms to tighten further. (This is going to be the real problem.)

``Higher delinquency rates will continue for some time,'' Chief Executive Officer Dennis Alter told analysts. ``What is not clear is where the economy and consumer behavior is headed.'' . . . .

. . . . . Foreign companies are starting to feel the fallout from weakness in the U.S. -- a reversal of the recent trend, in which American firms benefited from strength overseas.

Stockholm-based Ericsson AB, the world's biggest maker of wireless networks, said Nov. 20 that fourth-quarter sales may be at the lower end of a forecast it gave a month earlier as demand falters in North America and Europe.

The next day, Wolseley Plc said it will cut 1,300 jobs in the U.S. after the decline in homebuilding led to a 15 percent fall in profits at the world's biggest distributor of plumbing and heating equipment.

``Looking out over the next 12 months, the U.S. is going to be very challenging,'' Chip Hornsby, chief executive officer of the Reading, England-based company, said on a conference call.