July 2, 1012 – U.S. Companies in Dire Straits: The U.S. economy has held up remarkably well in the face of Europe’s financial crisis and China’s slowdown. U.S. companies? That is another story.
Lags in the release of economic data—to say nothing of the uncertain quality of official Chinese economic statistics—make figuring out exactly what conditions are like in Europe and China a guessing game. But to judge from what companies have been saying, the world outside the U.S. has gotten much worse.
Shares of Ford Motor F -4.96% fell sharply Friday after the company said it expects to lose up to three times as much overseas in the second quarter as the $190 million it lost in the first. The bulk of those losses are in Europe, where the combination of sharply falling demand and chronic overcapacity is leaching the auto sector. Consultancy AlixPartners reckons that two in five European auto plants aren’t producing enough cars to stay out of the red.
Europe was also a problem for Nike, NKE -9.40% which on Thursday reported disappointing earnings for the fiscal quarter ended in May. But the weakening in its Chinese business was even more eye-catching, with the company reporting that orders for delivery in the half-year that ends in November are up just 2% from a year earlier, controlling for currency fluctuations. That compared with a 20% increase in future orders that the company reported back in March.
Other multinationals have also been flashing warning signs. Monthly sales figures suggest that McDonald’s MCD +0.40% European business, where it generates nearly 40% of its income, is flagging. Outside North America, Caterpillar‘s CAT +2.76% monthly sales growth has shown a marked deterioration.
Many U.S. companies do little, if any, business overseas. Sectors like health care and home building, for example, should be well shielded. And even among multinationals, America remains the most important market.
But amid an uncertain U.S. economy, many companies have spent the past several years focusing expansion efforts overseas, with the consequence that any sales shortfalls could have outsize consequences for earnings. Layer in currency-translation effects—the euro is 13% below its year-earlier level—and matters are only worse.
The good news, for now, is European leaders’ agreement to aid struggling banks has lowered the odds of a full-blown financial crisis that would spill over into the U.S. It also makes businesses around the world feel a little less fearful and could one day set the stage for Europe growing again. But investors may soon find that in their rush to embrace the happy atmospherics of a European accord on Friday, they overlooked the reality of what is happening on the ground outside the U.S. As companies tally up results for the second quarter, there could be plenty of unpleasant surprises to come. (Credits- Justin Lahart for the Wall Street Journal).
The Master of Disaster