Recession Fears May Push Companies to Tighten More


U.S. companies that have slammed the brakes on spending, expansion plans and staffing will likely tighten the screws even further after data Tuesday suggested the U.S. is heading into a full recession.

Auto assembly line

Companies in industries ranging from apparel to industrial equipment to home improvement retailers had started to shutter units, cut inventory and lay off employees as the foundering housing market cut demand for their products. But Tuesday's data showed the pain was likely to worsen.

A report on the U.S. services sector showed a dramatic and wholly unexpected contraction in the largest part of the economy. It was the largest monthly drop on record.

"We see further retrenchment" in spending and cost cuts, said Matthew Kaufler, a fund manager with Clover Capital Management, in an interview with Reuters. "The number signifies the worst fears that were out there that this is going to be a broader and deeper slowdown than thought."

Investors shed stocks after the report, sending the Dow Jones Industrial Index down as much as 300 points.

"On face value, this index tells you that this recession we are heading into will be worse than the one in 2001," said Christopher Low, chief economist at FTN Financial in New York. "Business activity falls to an unprecedented level. We could see significant layoffs in February."

Companies from various sectors of the economy have made cautionary statements about their outlooks.

Fourth-quarter earnings were down 20.7 percent, although mainly due to the impact of the credit crisis on banks. Now there is increasing concern that the weakness is spreading into
other areas.

Plus-size women's apparel chain Charming Shoppes Tuesday said it would cut its capital budget even more than it had planned in August.

It also announced it had slashed 13 percent of its management positions, cut new store openings by 30 percent and would close 150 of its more than 2,400 stores.

Diversified manufacturer Tyco International told investors in a Tuesday conference call that its ADT security unit was "seeing some softness in our sales in North America as some of our large retail customers have pushed back their spending in new systems or upgrades."

Tyco said it believed these "are delays rather than cancellations" but some investors fear that a recession could tip the balance. Shares of Tyco, which were up some 3 percent before the ISM data, were down 4 percent at midday.

Cities too have cut budgets and will likely cut them more after lower home prices and sales have reduced real estate tax proceeds. IDEX Corp is one of several makers of emergency rescue equipment that have suffered as municipalities reduce spending.

"If the economy falls into recession, it's going to mean companies will see it in their results and companies are quick to cut back payrolls when demand drops," said John Challenger, CEO of outplacement firm Challenger, Gray & Christmas.

Fund manager Kaufler said companies that provide construction equipment, home goods and consumer products, as well as financial services would likely be the hardest hit.

"We are very cautious on the homebuilding" sector, he said, adding that his near-term outlook for building supply companies such as Home Depot Inc and home decor specialist Williams-Sonoma Inc was weak.

Also, diversified industrial companies "are in for some pain," he said, declining to name any.