wall street journal
Corporate America is facing a recession. Economic troubleshooter FedEx (FDX) stunned Wall Street last week with warnings of heavy earnings and a sluggish outlook for the global economy.
Bad news from FedEx on Thursday overshadowed a more promising development, a deal between rail operators and unions to avoid what could have been a crippling freight rail strike.
Still, investors remain nervous about the health of the rail business, indicating panic about the overall economy. Shares of top rail operators Union Pacific (UNP), CSX (CSX) and Norfolk Southern (NSC) have fallen sharply this year. Even Warren Buffett’s Berkshire Hathaway (BRKB), which owns Burlington North Santa Fe, has taken the plunge recently.
But FedEx isn’t the only company sounding recession alarm bells. In an unusually poor earnings call earlier this month, the CEO of high-end furnishings retailer RH (RH) (aka Restoration Hardware) said that “anyone who thinks we’re not in a recession is crazy” and Said that the housing market is in a recession which is “just getting started.”
Best Buy’s (BBY) chief financial officer said in late August that he expects sales growth to be slow. And while the company refrained from using the term recession, the CFO of Best Buy (BBY) said there is “a belief that current macro environmental trends may be even more challenging … for the rest of the year.”
The CEO of PVH, which owns the Tommy Hilfiger and Calvin Klein brands, noted in the company’s late-August earnings call that, “Higher gas prices and other inflationary pressures began to impact consumer discretionary spending. Turned out,” during the summer, adding that the change “was most evident to us in the middle-income and value consumer in North America.”
Chip equipment leader Applied Materials (AMAT) noted in an earnings call last month that some of its semiconductor customers are bearish “as macro uncertainty and weakness in consumer electronics and PCs forces these companies to postpone some orders.”
These are ominous signs. Even more companies are likely to refer to the slowing economy – some execs may even dare to use the R-word in the coming weeks. Most Corporate America operates on a calendar year schedule for earnings, which means they’ll report third-quarter results in October.
Tech titans Apple (AAPL) and Microsoft (MSFT), streaming leader Netflix (NFLX), consumer product giants Coca-Cola (KO) and Procter & Gamble (PG), restaurant chains McDonald’s (MCD) and Chipotle (CMG) and banking leaders JPMorgan Chase (JPM) and Goldman Sachs (GS) are some of the blue chips that will give financial updates next month.
The change in sentiment has been dramatic. Earnings for the third quarter as recently as June 30 were expected to rise about 10% compared to a year ago, according to estimates tracked by FactSet.
But as companies and analysts cut their outlook, forecasts now call for only 3.5% profit growth. This will be the worst quarter for earnings since a 5.7% decline in the third quarter of 2020, when the economy was battling the Covid-imposed lockdown.
Jon Butters, senior earnings analyst at FactSet, noted that the magnitude of the change in earnings estimates is the largest since the second quarter of 2020, when many companies went into shutdown mode for the first time.
Aggressive rate hikes by the Federal Reserve, which are expected to continue with the Fed raising rates sharply later this week, are also raising fears of a recession.
What’s more, other global central banks, including the European Central Bank and the Bank of England, are still in dire mode. This further increases the risk that a global rise in rates will lead to a further slowdown in income, consumer spending and the overall economy.
“The sentiment and market momentum have definitely turned negative,” Mark Hackett, head of investment research at Nationwide, said in a report last week. “Earnings fears have now joined inflation and the Fed in investors’ minds.”
Hackett said that “growth expectations are waning” and that CEOs and small businesses are worried about the slowdown.
It’s worth noting that not all recessions are the “Great Recession” like 2008. The US economy suffered a far more modest decline in the 1990s after the rise in oil prices during the first Gulf War, as well as after the burst of the dot-com bubble in 2001. And the 2020 Covid recession lasted just two months, the shortest drop on record.
There is a potential bright spot. Despite concerns about rising prices and rising mortgage rates, the US housing market is expected to slow, but it will not crash as it did during the subprime crises of 2007 and 2008.
Executives at companies such as construction equipment giant Deere (DE), home improvement retailers Home Depot (HD) and Lowes (LOW) and appliance maker Whirlpool (WHR) acknowledged in the conference call that there is a short-term softening in housing demand. Chances are, another massive bubble burst in the cards is unlikely.