U.S. economy still running on one cylinder
By MATHEW INGRAM
Saturday, September 14, 2002 - Page B6
Is this how the markets begin their long-rumoured slide back
to the lows of earlier this year -- with the consumer trying to hold up the entire economy, while
company after company cuts profit forecasts for the third and fourth quarter? Lucent and Honeywell
didn't give investors much hope yesterday, and their concerns were compounded by fears of war with
Iraq and weaker consumer sentiment numbers.
The fact that Lucent is still in trouble isn't all that surprising, of course, given the kind of shellacking
the telecom equipment market has taken and continues to take. However, it is a sign that things still
aren't getting any better -- and that is likely to make the hearts of Nortel shareholders even heavier,
since the future of both former superstars rests on a turnaround in the market for telecom
equipment.
Like Nortel, Lucent is trying to do two things: lay off staff and otherwise slash costs enough to break
even on anemic revenue, and at the same time sell off assets and otherwise scrape together enough
money to survive until that much-delayed break-even point finally occurs. Based on its latest
estimates, Lucent will have to cut more staff than it has already, and some analysts say Nortel's pain
isn't over either.
Lucent said yesterday that its revenue -- already a fraction of what it was in 1999 or 2000 -- will come
in 20 to 25 per cent lower in the current quarter than in the previous quarter. That's a massive
sequential loss of sales, and it raises questions about the ability of a company such as Lucent (or
Nortel) to remain competitive and attract business when it has lost 65 per cent of its staff and its stock
trades in the pennies.
Honeywell's report late Thursday that it was cutting its profit targets for the third time in three
months also wasn't all that surprising, since the reduction was based largely on the weaker prospects
for growth in the company's aerospace unit. The fact that the airline industry is in the tank, and that
Boeing's labour problems bode poorly for aerospace manufacturers, is well known -- but Honeywell
also made some negative comments about its perception of the broader economy as well.
The company said it was cutting its third-quarter forecast to 50 cents (U.S.) a share in profit --
compared with a consensus of 60 cents from Thomson Financial/First Call -- and said full-year results
would also be down by about 10 per cent from previous forecasts. Honeywell CEO David Cote blamed
the fact that "the broad economic recovery is not materializing." In addition to the aerospace sector,
Honeywell said revenues in its industrial systems and specialty materials units are also softer than
expected. That's not a great sign for an economy that is still waiting for industrial activity to pick up --
the missing second half of the economic story. The consumer side is still holding up well, especially
given the weakness in the recent consumer sentiment indicators, such as the drop in the University of
Michigan's index yesterday (to 86.2 from 87.6 in August). As if to prove that what consumers do
matters more than what they say, retail sales were higher than expected in August.
According to the U.S. Commerce Department, retail sales jumped 0.8 per cent last month, the third
month in a row that the indicator has risen (it climbed 1.1 per cent in July and 1.4 per cent in June).
Most economists had been looking for sales to climb 0.5 per cent. Excluding the automotive sector,
where sales have been driven by zero-interest-rate financing plans, the retail sales figure rose 0.4 per
cent -- which was also higher than the 0.1-per-cent gain that a majority of economists expected.
But as so many economy watchers keep pointing out, the United States cannot grow if all that's
happening is people are putting more furniture, appliances and cars on their line of credit --
particularly if those purchases are being fuelled by unsustainably low interest rates, as they are in
the case of autos. There needs to be growth in the industrial and manufacturing side of the economy,
and so far indicators such as the ISM index (from the Institute for Supply Management) have been
lacklustre at best.
That's the environment as we head into "confession season," when companies reveal their
third-quarter results and their outlook for the fourth. So far, it looks as though anything tied to retail
or housing and related sectors could do well, but the rest of the market is a question mark. Telecom
remains a black hole, judging by Lucent and Nortel, and Honeywell's warning doesn't bode well for
the industrial sector.
"The stock market is posed for the crucial period of earnings 'preannouncements', the time during
which firms warn the investment community that they won't meet earnings expectations,"
institutional research firm Stone & McCarthy said Thursday.
"So far, the trend with respect to Q3 'preannouncements' has been negative. We fear that the slashing
of third and fourth quarter earnings estimates will reaccelerate in the days ahead."
If the markets do manage to climb in the weeks ahead, they will have to climb the proverbial "wall of
worry" in order to do so.
Mathew Ingram writes analysis and commentary for globeandmail.com.
mingram@globeandmail.ca
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