A chief executive talking about recession is hardly the canary in the coal mine—executives are typically the last to acknowledge that the economy is performing poorly—but it is probably one of the biggest indicators that a recession is coming or even already under way.
Indeed, the prevalence of recession talk in quarterly filings and earnings conference calls last week show that companies are trying to dampen earnings expectations for the next quarter and through early 2009. By then, recession may become a leading risk factor in company filings, as it is in some already.
“When there gets to be a consensus all around that there is a recession, there is less concern about using that word,” said Barbara Franklin, former U.S. commerce secretary and member of the boards of Aetna and Dow Chemical Co. “I’m not sure if we’re there now… [but] I think any prudent company at this point is going to be conservative about everything.”
Some execs still are couching their comments carefully. Caterpillar CEO Jim Owens said in a recent earnings call that the U.S. and European markets were “in very poor economic health and have in fact experienced recessionary conditions.” A worldwide recession is a “worst-case scenario,” he added.
Meanwhile, René Jones, chief financial officer at M&T Bank, recently told analysts that “we’re likely to move our way into a recession,” although he predicted that the company would continue to perform strongly in certain regional markets.
As far as McClatchy Co. chief executive Gary Pruitt and Netflix CEO Reed Hastings are concerned, a recession is already here. Both spoke of a recession in the present tense during their earnings calls last week, and both said their companies’ growth would slow considerably in the fourth quarter compared with the fourth quarter of last year.
“It will be difficult to maintain margins for sure, but we would expect that we will get through this recession,” Pruitt said, adding that “we would expect to see some recovery in margins as the economy strengthens.”
Talk of recession is far from universal. Some companies don’t want to come off as too conservative in their approach, especially if they are outperforming peers, said Mark Ellis, CFO of gift and jewelry retailer Michael C. Fina.
“We’re all peering out there and can’t exactly see the road ahead right now,” he said.
Other companies don’t seem to be concerned about a recession even if one seems imminent. Investment management firm BlackRock laid out a somewhat positive outlook. CEO Larry Fink said that “much of the hostile times in terms of insolvency are behind us” and predicted that interbank lending will start to pick up soon, thereby unlocking credit markets. However, he said those upbeat developments would occur “despite a recession that we are going to be facing.”
Philip Morris CFO Hermann Waldemer told investors last week that “no business in the world is actually recession-proof, but I am convinced that our business is very recession-resilient. There is no replacement product to cigarettes, and our smokers are very loyal to our brand.”
At least one major company is already citing a recession as one of its leading risks. Among the primary risk factors cited in Halliburton’s most recent 10-Q is a “possible worldwide recession” that would reduce demand for energy and cause oil and natural gas prices to plummet, thus hurting the company’s ability to meet earnings expectations.
Other quarterly filings have so far steered clear of using the “R” word, but have deployed such terms as “economic downturn” and “credit tightening” to explain potential losses.
If economic conditions worsen, as many economists expect, many companies may enter what Yahoo CFO Blake Jorgenson termed “recession mode” in an interview last week with the Associated Press.
Recession mode can involve different tactics in different industries. Cerner Corp. general manager Mike Valentine told investors during the company’s earnings call last week that a “sustained recession and credit crunch could start to impact our clients’ ability to invest in [information technology].” Which is why Cerner will widen the range of the risks it could face during its guidance next quarter, he said.