Downward Spiral for the U.S. Economy

A perfect storm has hit the U.S. economy this quarter – and the odds are high that it still has a considerable way to go.

Our latest ChangeWave corporate survey shows the economy locked in an accelerating downward spiral, led by sharply lower 3rd Quarter sales projections, reduced visibility, a worsening job market and a further plunge in business capital spending.

Importantly, the temporary improvement that resulted from the April/May infusion of $150 billion in U.S. economic stimulus rebates has evaporated.

But even more tellingly, our survey of 3,058 corporate respondents shows a serious worsening occurring in the U.S. credit crisis.

Let’s take a quick look at why the U.S. downward spiral still has a considerable way to go.

3rd Quarter Sales – Worst in Years

Only 18% of respondents project that their company sales will come in Above Plan for 3rd Quarter 2008 – a 4-pt decrease from the previous quarter. Another 35% report their company sales will come in Below Plan – 5-pts worse than previously.

Just how striking a downturn it is can be seen in the following chart, which shows the last four years of corporate surveys. Simply put, the percentage of companies projecting Below Plan sales (35%) is nearly double the percentage projecting Above Plan sales (18%).

Note that you have to go all the way back to the depths of the 2001-2002 recession to find such dismal results in a ChangeWave survey.

4th Quarter Sales Pipeline

There is also reduced visibility going forward. Sales pipeline projections for 4th Quarter 2008 show just 21% of respondents say their company will come in Above Plan – 2-pts less than the previous quarter, while 23% report they’ll come in Below Plan.

And in a further sign of deteriorating business conditions, respondents project negative capital spending going forward. In other words, by a wide margin more project a decrease in their company’s 4th Quarter capital budget (26%) than an increase (9%).

Credit Crisis Tightens its Chokehold

To compound things, in the most bearish finding of the survey, the U.S. credit crunch has taken an ominous turn for the worse in the past 90 days.

One-in-four respondents (25%) now say it’s harder for their company to borrow money than it was just 90 days ago – a 7-pt jump from previously. Only 1% say it’s easier to borrow. Moreover, the tightening of credit availability has occurred across companies of all sizes.

The labor market also shows deterioration. As the following chart shows, our latest survey contains the worst jobs numbers we’ve reported in years.

A Silver Lining

There is one silver lining, however. The results of our August 26 – September 4 survey shows Fed Chief Bernanke really did get it right when he said the slowing economy would help bring down inflation.

In previous 2008 surveys we witnessed a dramatic upward movement in price pressures, but this time we’re seeing a reversal. Only 22% now report prices are rising for their company's products – down 3-pts. At the same time, the percentage reporting falling prices (14%) is up 3-pts.

*Note that a total of 56% report their company’s prices are holding firm in the marketplace.

This notwithstanding, the improvement we're seeing on the inflation front is due to the further leg downward for the U.S. economy – and therefore comes at an enormous cost.

In sum, the overall ChangeWave survey results present all the elements of a perfect storm:

The $150 billion economic stimulus package is long since spent, and in the aftermath we’re seeing the U.S. economy take another serious leg downward.

The downturn in 3rd Quarter sales, negative capital spending growth, a contracting labor market and reduced 4th Quarter visibility are the immediate symptoms, but there’s something even tougher afoot:

The U.S. credit crunch has taken an ominous turn for the worse over the past 90 days, and there are no signs that the situation has yet begun to stabilize.

So what’s the takeaway from all this?

With the election still two months away and no immediate economic catalysts on the horizon, the odds are high that the downward spiral in the U.S. economy still has a considerable way to go.

Comments

[investor88:]

The title to Paul's article says it all: Downward spiral for the US economy. The arguments are valid. Some pessimistic analysts are looking at Dow 8000 sometime in the future, US housing markets not bottoming until 2014 some 6 years from now and thereafter sluggish until 2022. It would be presumptious of anyone to project things to 2022 but it doesn't hurt to prepare for the worst, hope for the best. There will be severe but unavoidable economic cycles from time to time, we are now in a particularly severe down cycle that no one less than Greenspan says is the worst in a 100 years.

2008 Sep 18 11:01 AM

[sickofthehype:]

Rural Montana, canned food, hunting gear. It's the end of the world!!!!!!!

2008 Sep 18 11:28 AM

[SW Richmond:]

"Rural Montana, canned food, hunting gear. It's the end of the world!!!!!!! "

And don't forget, no more high maintenance women. Git yerself one that's real.

2008 Sep 18 11:54 AM

[Steven Hansen:]

just remember the dow and the economy do not move in sync. i would not predict when the market will move, but i do agree the economy is probably screwed for a long time to come.

2008 Sep 18 09:15 PM

[carey_jim:]

It looks like speculators are firmly in control of the markets and if the markets go down far enough the speculators will be given a holiday.

Maybe the solution would then be to ship speculators to the Cayman islands for the winter?

2008 Sep 19 10:11 AM