Railroads, chemical producers and insurance companies are blaming the worst U.S. housing slump in 16 years for their earnings woes.
Burlington Northern Santa Fe Corp., the second-biggest U.S. railroad, said lower shipments of housing products and lumber reduced second-quarter earnings. DuPont Co., the third-largest chemical maker, said slumping demand for kitchen and bathroom countertops was partly responsible for its profit drop. Genworth Financial Inc., the former insurance unit of General Electric Co., said earnings will be at the “lower end” of its forecast this year as mortgage-insurance claims increase.
“The subprime slime is oozing,” said Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey, who correctly predicted the recession in 2001. “As home equity evaporates, that takes out the foundation of strong consumer spending growth, which has been the mainstay of the economy.”
U.S. profit growth has been cut by more than two-thirds because of the housing slowdown, according to David Rosenberg, chief North America economist at Merrill Lynch & Co. Earnings growth is running at 6 percent and would be 19 percent, he said. Business is suffering as home sales plunge more than economists estimate and foreclosure filings in the U.S. jumped 58 percent to 573,397 in the first half, according to RealtyTrac Inc.
“Companies that make anything that goes into a home, all the wiring, plumbing, anything related to coatings and fixtures, will certainly be suffering,” said Gene Pisasale, who helps manage $25 billion, including DuPont shares, at PNC Wealth Management in Baltimore.
The fallout may be even broader, as dwindling property values erode shoppers’ savings. Sales at 53 retail chains rose 2.3 percent from a year earlier from February to June, down from 3.9 percent growth a year ago, according to the International Council of Shopping Centers in New York.
Federal Reserve policymakers have said housing is the biggest risk to the six-year economic expansion. The link with the property market is inextricable as housing and related industries account for almost 25 percent of gross domestic product, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.
“Clearly it’s having an impact,” said Nicolas Retsinas, director of the Harvard center, referring to housing. “How much of an impact, at this point, is easier to understate than overstate.”
About a third of job creation and almost half of consumer spending since the 2001 recession stems from housing, according to Shilling, who expects an economic contraction by the end of the year.