Caterpillar Recession Warning Dismissed by Executives

Caterpillar, the world's biggest maker of bulldozers and excavators, says the U.S. economy may fall into a recession next year. Ford Motor Co., DuPont Co. and Intel Corp. disagree.

Caterpillar cut its profit forecast on Oct. 19 because of the U.S. housing slump and said the economy would be ``near to, or even in, recession'' in 2008. U.S. stocks fell the most in two months.

Peoria, Ill.-based Caterpillar remains an outlier among U.S. companies. While near-record oil prices, the housing plunge and mortgage defaults will cause the economy to slow, it won't slip into a recession, said executives including Joseph Moglia, chief executive officer of TD Ameritrade Holding Corp., the third-biggest online brokerage.

``The consumer is concerned about rising energy prices, what's going on in the credit cycle and the real estate market,'' Moglia said in an interview. ``I don't believe they can have those concerns and not have some impact on what they're doing. That does not mean we're headed for a recession.''

The two-year housing recession and related loan losses are taking a toll on corporate earnings. Profit of Standard & Poor's 500 Index members may have fallen for the first time in more than five years in the third quarter, breaking a 20-quarter streak of gains exceeding 10 percent, according to data compiled by Bloomberg.

Mortgage Losses

The 301 companies in the S&P 500 that had reported through Oct. 26 posted an average profit decline of 0.8 percent. Counting analysts' estimates for companies that haven't reported, average earnings may have fallen 1.6 percent in the quarter, according to the data.

The overall results are skewed by financial companies clobbered by losses on mortgage-backed debt. Merrill Lynch & Co., the biggest U.S. brokerage, on Oct. 24 reported a quarterly loss of $2.24 billion, the biggest in its history. Citigroup Inc., the largest U.S. bank, said on Oct. 15 its earnings dropped 57 percent in the quarter.

Excluding financial companies, earnings of S&P 500 companies through Oct. 26 rose 11 percent, almost tripling analysts' estimates as of Sept. 27, prior to the reporting period, according to data compiled by Bloomberg.

``We've seen significant weakness from financial companies, which should surprise no one,'' said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York. The firm oversees about $1 billion. ``Overall, earnings have come in above Wall Street expectations.''

`No U.S. Recession'

A majority of chief executive officers in a survey released Oct. 11 by the Business Council predicted U.S. growth will slump to 2 percent or less next year and that the economy will avoid a recession. The group includes the heads of Fortune 500 companies including American Express Co., Procter & Gamble Co. and General Electric Co.

A recession is two successive quarters of declining gross domestic product. Economists expect U.S. GDP to grow 1.8 percent in the fourth quarter and 2.5 percent in 2008, according to a Bloomberg survey. The economy grew 3.8 percent in the second quarter and the Commerce Department on Oct. 31 probably will report third-quarter growth of 3.1 percent, the survey showed.

For 2008, ``we're assuming global GDP growth at about the same rate as 2007, strong agricultural business and no U.S. recession,'' DuPont Co. Chief Executive Officer Charles O. Holliday Jr. said in an earnings conference call Oct. 23. ``We have no expectations of an uptick in demand from U.S. residential housing market this quarter or even next year.''

Notebooks Boom

Wilmington, Delaware-based DuPont, the third-largest U.S. chemicals maker, reported quarterly profit increased 8.5 percent on rising international demand for seeds and Kevlar and said 2008 earnings will gain as much as 10 percent.

U.S. buyers of computers don't seem concerned about the economy, Intel Corp. CEO Paul Otellini said in an interview on Oct. 23.

``People are buying notebooks like they're hotcakes, and companies tend to invest in technology in downturns,'' Otellini said. Sales to non-U.S. markets will make up for any reduction in U.S. consumer spending during a slowdown, he said.

Santa Clara, California-based Intel, the world's biggest computer-chip maker, reported a 43 percent rise in third-quarter earnings on Oct. 16.

``Global: strong. U.S. housing: tough. But the rest of the U.S. seems fine to us,'' General Electric CEO Jeffrey Immelt said in a conference call Oct. 12. Fairfield, Connecticut-based GE reported a third-quarter profit increase of 7.1 percent, helped by increased sales of locomotives and power-plant turbines to China and the Mideast.

Counting on Fed

Executives say they are counting on the Federal Reserve to cut interest rates to spur the economy when policymakers meet on Oct. 30 and 31. The Federal Open Market Committee lowered the target rate for overnight loans between banks by half a point on Sept. 18, more than most economists had forecast, to 4.75 percent. The cut was the first in four years.

``I am very optimistic on some of the actions taken recently, like the Fed,'' Alan Mulally, CEO of automaker Ford Motor Co., told reporters in Wayne, Michigan, on Oct. 15. ``Hopefully, the subprime will improve and housing will stabilize again. We also have a good, growing U.S. economy. There's a lot to be positive about.''

Fed Funds Futures

Fed funds futures on the Chicago Board of Trade on Oct. 26 suggested a 92 percent chance policy makers will reduce borrowing costs by a quarter-percentage point to 4.5 percent at its meeting and 8 percent odds of a cut to 4.25 percent.

``I am much more worried about recessionary impacts rather than inflationary impacts,'' Clayton Jones, CEO at Rockwell Collins Inc., the Cedar Rapids, Iowa-based maker of airplane- cockpit instruments, said in an interview. ``If I were sitting on the Fed, I'd probably err a little bit more to making sure that some of the issues of access to capital are continuing to flow.''

Caterpillar remains pessimistic about the U.S. economy. ``We don't expect big improvements in North America any time soon,'' David Burritt, Caterpillar's chief financial officer, said in an interview. The worst U.S. housing recession in at least 16 years will lead to a 12 percent decline in North American machinery and engine sales this year, Caterpillar said.

Consumer Worry

U.S. consumers say they also are worried about the economy. Almost two-thirds of Americans said a recession is likely in the next year, and a majority said the economy is already faltering, according to a Bloomberg/Los Angeles Times poll taken Oct. 19-22. The survey showed the gloomiest view of the economy since February 2003.

The housing market accounts for as much as 23 percent of U.S. GDP, through sales of copper pipes to carpeting to kitchen cabinets. Purchases of new and existing homes fell to an annual pace of 5.81 million, the fewest since record-keeping began in 1999, the Commerce Department reported last week.

``We really thought the housing market was going to recover at the end of 2007, giving us a nice tailwind into 2008,'' said Greg Hayes, vice president for accounting and finance at United Technologies Corp., the Hartford, Connecticut, maker of air conditioners, jet engines and elevators. ``That's obviously not going to happen.

``While we don't expect a recession in 2008, we do expect the U.S. economy to slow further,'' Hayes said.