Even though members of the Adminstration and the financial media keep insisting that the economic fundamentals are sound, executives at major companies, who see what is happening in the real economy (admittedly through the window of their comany’s activity) before it is captured in statistical releases, are finding it hard to read the trajectory of the economy. Interestingly , they are looking to their peers, via third-quarter results, to get a better reading. As the Financial Times reports:
Corporate America is braced for the worst period of economic uncertainty since the start of the decade as the credit squeeze and the housing meltdown heighten the risk of a US slowdown.
US chief executives say the economic outlook has not been so difficult to read since the last recession in 2000-01. They warn that in spite of signs of a pick-up, the threat of an economic contraction is still alive.
Conflicting economic indicators and volatile business conditions make it difficult to take strategic decisions such as whether to hire or fire staff, or increase or slash capital expenditure, business leaders told the Financial Times.
They said they would watch the third-quarter earnings reporting season, which begins this week, to gauge whether companies had managed to cushion the twin blows from the housing crisis and the liquidity squeeze…
Worries of a severe downturn eased on Friday when stronger-than-expected employment numbers fuelled hopes that the US economy would pick up next year after a couple of quarters of subdued growth.
However, a number of sectors remain under pressure. The National Retail Federation predicted a 4 per cent increase in retail store spending in November and December to $474.5bn (€337bn, £233bn), the lowest growth for five years. Many executives in the retail sector fear that housing problems will hit spending before the holiday season.
“I don’t think anybody knows for sure exactly what the consumer is going to do this fall,” Ken Hicks, the president of JC Penney, the department store chain, recently told investors.
Other stories underscore the worries about the economy. The Wall Street Journal tells us that strip mall vacancies are at the highest level in over five years:
The strip-mall vacancy rate rose to 7.4% in the third quarter, from 7.3% in the second quarter and 7% in the year-earlier period. Along with the first quarter of 2002, when the vacancy rate was also 7.4%, that level was the highest in 11 years, according to a survey of 76 U.S. retail markets by Reis.
An Associated Press story via the Houston Chronicle (hat tip Housing Wire) informs us that the S&P’s lead economist sees the housing recession persisting until 2009:
The U.S. subprime crisis is likely to get worse, dragging down U.S. economic growth, the chief economist of Standard & Poor’s said Tuesday.
“The panic has subsided but the housing market has not hit bottom yet. It will not hit bottom until winter. Housing prices won’t hit bottom until next summer and the losses won’t peak for another two years, until 2009,” said David Wyss at a press briefing in Mumbai. “We are not halfway through this crisis yet.”
S&P forecasts the U.S. economy to grow 2 percent in 2007 and also in 2008, while the global economy is expected to grow 3.6 percent and 3.5 percent in the same period.
“We are looking at another year of sluggish growth and that’s consistent with an uptick in the unemployment rate to 5 percent,” Wyss said.
And the ever chipper Nouriel Roubini points out that consumers look overstretched:
US retail sales slowed down in September and early October based on weekly data provided by the International Council of Shopping Centers and UBS Securities as well as by Redbook Research.
Same store sales grew only 2% in September relative to a year ago (i.e. they fell in real terms). Sales grew only 0.3% in September relative to August; and sales in the first week of October were flat relative to the previous week.
This slowdown in consumption is not surprising as the saving-less and debt burdened US consumers is now on the ropes and at a tipping point. Headwinds against consumption include sharply falling home prices and home values (now falling at a 9% annual rate based on the Case-Shiller/S&P index), sharply falling home equity withdrawal (now down to about $140 billion at annual rate from its $700 billion peak in 2005), a credit crunch in the mortgage markets that is now slowly spreading to other types of consumer credit, a falling consumer confidence, high oil and gasoline prices (with oil hovering around $80), concerns about the financial turmoil and volatility and a slowing and slackening labor market where – in spite of still positive job creation – the rate of job growth is slowing down and many other indicators of the job market signal a slackening of this market.
With consumption being 72%, with residential investment still falling at a 15-20% rate in Q3 and with capex spending by the corporate sector being flat in Q3 (after two months of falling durable goods orders) and the credit crunch in financial markets still serious in spire of a modest and tentative mending of the liquidity crunch, the most likely outlook for the US economy is still one of a hard landing.
