(CNN Business)–American companies are starting to prepare for a recession. FedEx last week surprised Wall Street with a huge profit warning, and a tepid outlook for the global economy.
Bad news for FedEx overshadowed a promising development Thursday, the agreement between rail operators and unions to avoid what might have been a crippling strike of freight trains.
However, investors remain concerned regarding the health of the rail business, which is a sign of concern regarding the overall economy. Shares of major rail operators Union Pacific, CSX and Norfolk Southern have all fallen sharply this year. Even Berkshire Hathaway, owned by entrepreneur Lorne Buffett, recently went into a downturn.
But FedEx isn’t the only company raising the alarm regarding a recession. “Anyone who thinks we’re not in a recession is crazy,” the chief executive of upscale furniture retailer RH said in an unusual earnings call earlier this month, adding that the housing market downturn “has just begun.”
Best Buy’s chief financial officer said at the end of August that he expects sales growth to continue to slow. While the company avoided using the term recession, the company’s chief financial officer said: “There is a belief that current macro-environment trends may be more challenging… for the rest of the year.”
The CEO of PVH, which owns the Tommy Hilfiger and Kelvin Klein brands, noted in late August that “rising fuel prices and other inflationary pressures are starting to affect consumer discretionary spending” over the summer, adding that the shift “was more pronounced for us at middle-income and most profitable consumers in North America”.
These signs are ominous, and more companies are likely to signal a further slowdown in the economy. Most US companies operate on an annual earnings schedule, which means they will report third-quarter results in October.
Tech giants like Apple, Microsoft, flagship Netflix, Coca-Cola, Procter & Gamble, McDonald’s restaurant chains, and banks like JPMorgan Chase and Goldman Sachs are just a few of the big companies that will release their results next month.
According to estimates tracked by FactSet, the change has been dramatic. On June 30, third-quarter earnings were expected to rise nearly 10% from a year ago.
But as companies and analysts cut their forecasts, forecasts now point to a profit increase of just 3.5%. This will be the worst quarter for earnings since a 5.7% drop in the third quarter of 2020, when the economy was suffering from COVID-19-enforced lockdowns.
John Butters, chief earnings analyst at FactSet, notes that the magnitude of the change in earnings estimates is the largest since the second quarter of 2020, when many companies first entered shutdown mode.
The Fed’s aggressive rate hikes, which are expected to continue with the possibility of another rate hike this week, are also stoking recession fears.
Moreover, other global central banks, including the European Central Bank and the Bank of England, are also in a tightening mode. This adds a risk that the global rise in interest rates will further slow down profits, consumer spending and the general economy.
It is worth noting that not all recessions are “major recessions”, like the year 2008. The US economy experienced milder recessions in 1990 following the oil price hike during the first Gulf War and in 2001 following the collapse of the dot bubble -com”. The Covid recession in 2020 only lasted two months, the shortest downturn on record.
There is one potential bright spot. The US real estate market is expected to slow, despite concerns regarding price hikes and higher mortgage rates, but it won’t collapse as it did during the 2007-2008 mortgage crisis.
