"Our Data Is Not Good" - US Companies Warn That A Recession Is Coming

Earlier this month, we highlighted comments from new Fastenal CEO (and former CFO) Dan Florness who, on the company’s Q3 call, took homage to one analyst’s suggestion that we’re currently in a “non-recessionary environment.” Here, as reminder, is the exchange:

William Blair’s Ryan Merkel: Then just lastly, Fastenal growing zero percent here in September and in a non-recessionary environment, it’s pretty surprising, I think, for a lot of us. 


Florness: The industrial environment is in a recession - I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.  

There you go. No ambiguity there. Nor was there anything ambiguous about some of the numbers Fastenal reported. For instance, in September, the company saw its first Y/Y sales decline since 2009. 

And the nuts and bolts manufacturer isn’t alone. 

As we’ve been keen on documenting, bellwether Caterpillar is in the midst of a truly historic sales slump that’s now entering its 35th month. 

It’s fairly easy to explain this if one simply looks at what’s going on at the macro level. Everyone - the WTO, the OECD, the ADB, etc. - now seems to be of the opinion that we may have entered a new era wherein sluggish global growth and trade have become structural and endemic. China’s “hard landing” is both a symptom and a cause of the malaise and the excessively strong dollar isn't doing US multinationals any favors either.

In this new reality, companies are gradually coming to grips with the fact that we’re simply not in Kansas anymore (so to speak) despite trillions in global QE and the proliferation of ZIRP and NIRP. As WSJ reports, “Big firms [are now set] to post [their] first decline in both earnings and sales since the recession.” Here’s more:

Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending.


From railroads to manufacturers to energy producers, businesses say they are facing a protracted slowdown in production, sales and employment that will spill into next year. Some of them say they are already experiencing a downturn.


“The industrial environment’s in a recession. I don’t care what anybody says,” Daniel Florness, chief financial officer of Fastenal Co., told investors and analysts earlier this month. 


Caterpillar Inc. last week reduced its profit forecast, citing weak demand for its heavy equipment, and 3M Co., whose products range from kitchen sponges to adhesives used in automobiles, said it would lay off 1,500 employees, or 1.7% of its total, as sales growth sagged for a wide range of wares.


Industrial companies are being buffeted on multiple fronts. The slump in energy prices has gutted demand for drilling equipment and supplies. Economic expansion is slowing in China and major emerging markets such as Brazil, which U.S. companies have relied on for sales growth. And the dollar’s strength also has eroded overseas profits.


Profit and revenue are falling in tandem for the first time in six years, with a third of S&P 500 companies reporting so far. Analysts expect the index’s companies to book a 2.8% decline in per-share earnings from last year’s third quarter, according to Thomson Reuters.


Sales are on pace to fall 4%—the third straight quarterly decline. The last time sales and profits fell in the same quarter was in the third period of 2009.


If you look at kind of the broad industrial-production index, you see industrial production sequentially coming down,” said Fredrik Eliasson, chief sales and marketing officer at railroad operator CSX Corp.


U.S. manufacturing production rose in September at its slowest pace in more than two years, the Institute for Supply Management reported earlier this month. 


And truckload carriers have warned that they aren’t witnessing the usual uptick in retailer demand as the holiday season approaches, thanks to stubbornly high inventories, said Alex Vecchio, a transportation analyst at Morgan Stanley. “Transportation companies are typically a leading indicator, and our data is not good,” Mr. Vecchio said.

So far, companies have relied on financial engineering to artificially inflate the bottom line. Yield-starved investors have been more than willing to snap up new IG and HY supply and corporate management teams have used the proceeds to fund EPS-inflating buybacks. Now that the cost of capital is set to (maybe) rise, and now that investors are beginning to get wise to the charade thanks to publicity from the likes of Hillary Clinton and BlackRock, the game may be up:

Some investors and analysts worry that companies accustomed to boosting earnings by cutting costs, repurchasing shares and refinancing debt will soon have to face the reality of worsening sales. “The ability of corporations to take a 1% to 2% revenue line [gain] and turn it into 5% to 6% profit growth is waning,” said Charlie Smith, chief investment officer of Fort Pitt Capital Group. “They’ve run out of rabbits to pull out.”

In other words, all signs now point to recession and the "strategy" of leveraging balance sheets to inflate earnings at the expense of growth and producitivty (i.e. making investments in capital both human and otherwise) has all but run its course.

On the “bright” side, the US has a fantastic opportunity in Syria to implement the tried and true method of engineering an economic boom: start a world war.