Sentiment Sours, Companies More Cautious

FXStreet is reporting US Housing Slump Deepening; Firms More Cautious

U.S. companies are increasingly worried about the economy amid signs that the housing recession is deepening, according to a survey released Monday by the National Association for Business Economics (NABE).

NABE Survey Results

• 54% of respondents expect a "substantial" housing slowdown in the next six months, and over 40% expect a mild slowdown. Half of respondents expect housing to impact their firms.
• 43% of firms expect to increase capital spending over the next year, down from 50% in the July survey.
  
• Under one-third expect to increase payrolls over the next six months, down from 41% in the July survey.
• Thirty-six percent of respondents said tighter credit conditions have negatively affected their businesses, while 56% said they saw no effect.
• One-third of NABE respondents said they expect to charge higher prices over the next three months, up from 25% in the July survey, suggesting companies expect to achieve a greater degree of pricing power.

Bank Lending Soars

The figures from NABE suggest one thing but bank lending (at least on the surface) suggests another. The Wall Street Journal is talking about bank lending in Prior Loans, Future Pain?

Since midsummer, bank lending to businesses has risen at the fastest rate in more than 30 years, providing a cushion for the economy as lenders cut back on mortgages and other forms of loans.

The problem is, in many cases, banks never expected to make these loans. They had extended backup credit lines to such companies as tax preparer and mortgage lender H&R Block Inc. In August, when H&R Block, which has struggled to rid itself of its subprime-lending unit, couldn't borrow in the securities markets, it tapped $850 million of the $2 billion credit line it has with a group of banks to meet its cash needs, calling the banks "a more stable source of funds."

Besides credit lines, banks have been forced to take on loans they made to private-equity firms seeking to buy publicly traded companies. Normally, the banks would have sold these loans off to investors, but, when there weren't buyers, they had to hold on to them. Lehman Brothers Holdings Inc. estimates more than $150 billion in buyout loans still need to be sold by the banks in the months ahead. Some banks also are at risk of having to take billions of dollars in more debt onto their balance sheet because of troubles with some off-balance-sheet lending vehicles.

These factors contributed to the dreadful results reported by the major banks last week. Among the hardest hit was Citigroup Inc., which had its capital cushion fall just below its target level. J.P. Morgan Chase & Co., which held up better, is being conservative. "We've been very careful in our middle-market lending," James Dimon, J.P. Morgan's chief executive, said Wednesday.

Brian Denney, who heads Denney Jewelers in Springfield, Ill., says more of his customers are getting turned down on loans for jewelry. Meanwhile, jewelry makers, which had been providing 30-day grace periods before demanding payment for inventory, now want cash upfront. That has forced him to stock his shelves with less-expensive products.

Professor Kevin Depew discussed the lending surge in point number one of Monday's edition of Five Things : Bank Lending Surge a Good Thing? Not So Fast.

• Typically, such a large increase in commercial and industrial lending would be a sign of economic growth and of businesses seeking to expand operations.
• However, much of the growth now is the result of banks being forced to bring asset-backed commercial paper back onto their balance sheets as SIV's run aground.

Target Trims Forecast

I am quite skeptical about that "Pricing Power" mentioned in the NABE survey. It's unlikely to come on goods from China with Wal-Mart slashing prices and retailers like Target Trimming October Forecasts.

Target Corp. (TGT) on Monday trimmed its October forecast for sales growth at stores open at least a year to a range of 2% to 4%. In a recorded message, the retailer cited "greater than normal daily volatility and continued disappointing sales results for the first two weeks" of the month for the move. It had previously forecast same-store sales growth of 3% to 5% for October

Wal-Mart Reduces Planned Super-Centers

The latest analysis suggests that Wal-Mart may benefit from slower U.S. store growth.

Ahead of its two-day analyst meeting that begins Tuesday, analysts and investors said the world's largest retailer, which already scaled back its supercenter store growth plan, can use some additional cutbacks. Wal-Mart in June said it will increase U.S. square footage growth by about 4% to 5% for fiscal years 2008 and 2009 and lowered its capital spending forecast to $15.5 billion from $17 billion.

Same-store sales at U.S. Wal-Mart stores in the first 35 weeks of the year rose 0.8% this year, compared with 2.5% last year after the retailer failed to lure higher-income shoppers with more upscale apparel and home furnishing products, analysts said. The retailer last week cut prices on 15,000 additional items, 20% more than last year, as it said it plans to be more aggressive with price cuts heading into the holidays, many retailers' biggest sales and profit period.

In the U.S., Wal-Mart plans to open just 190 to 200 new supercenters this year, including relocations and expansions, from an original plan of as many as 270, it said in June. "Greater clarity on capital allocation would be a positive," said Goldman Sachs analyst Adrianne Shapira.

Greater Clarity

This was the second reduction by Wal-Mart in planned stores. Where is that corporate capital spending savior that everyone was talking about last year? Even with those cutbacks, Wal-Mart's expansion plans are still far too robust. Same store sales are lagging and further expansion is going to put continued pressure on prices, not only for its stores but for stores of its competitors.

Fear of losing market share keeps retail companies expanding no matter how silly (and costly) that expansion really is. Competitive overexpansion of stores is the retail sector version of Economic MAD (Mutually Assured Destruction).

The homebuilder version of economic MAD is quite similar. It can be summed up with the sentence: "Builders build until they go bust". On that score it's Neumann Down, More To Come as Chicago based Neumann Homes files chapter 11. Over expansion by Neumann in the face of a sentiment change by consumers sealed its fate.

The Central Bank version of MAD was detailed in Economic Chicken vs. Mutually Assured Destruction.

Job growth is already anemic because of layoffs in manufacturing, homebuilding, and the financial sector. Weak jobs growth is one factor that makes living paycheck to paycheck harder every month. (Please see Destined To Fail for more details) .

The jobs picture will take another turn for the worse if retail stores and restaurants like Wal-Mart (WMT), Target (TGT), Lowe's (LOW), Home Depot (HD), Best Buy (BBY), Pizza Hut (YUM), and Applebee's (APPB) all reduce expansion plans. There is every reason they should too, even if MAD has kept the commercial real estate party going far longer than expected.

All parties come to an end however, and consumers are leading the way with sentiment changes (first in housing, and now in retail). Retailers and restaurants will be forced to follow suit or they too will end up in bankruptcy court, just like Neumann.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/