The housing slump hit companies like Caterpillar, which saw a 21 percent drop in profit its second quarter this year.(David Boily/AFP/Getty Images)
The housing slump hit companies like Caterpillar, which saw a 21 percent drop in profit its second quarter this year.
(David Boily/AFP/Getty Images)

Housing Slowdown Spreads to Secondary Industries

August 15, 2007  •  From
The housing slowdown is spreading to construction suppliers and home improvement chains. Will squeezed profit margins lead to job cuts?

Many companies are absorbing the effects of the year-long slowdown in housing construction and sales. Other companies are not, as bankrupt mortgage lenders New Century Financial, American Home Mortgage, and dozens of other busted lenders can attest to.

Outside the frontline financial and home building sectors, however, little attention has been paid to the secondary housing-related sectors that are suffering the effects of the slowdown.

Take usg Corporation, the nation’s largest drywall maker, employing around 14,000 workers. Though still profitable, the company’s second-quarter net income plunged 68 percent from $176 million last year to $56 million, due primarily to falling drywall prices.

Over the past year, usg cut approximately 1,100 jobs. Its chairman and chief executive officer admits that “business is tough .… The housing recession is entering the second year of what is likely to be a multiyear downturn.” Still, usg and its competitors are optimistically churning out new plants. Are they too optimistic?

Home Depot, the world’s largest home improvement store chain, also released terrible second-quarter results. Hurting from slow sales due to weakness in the housing market, which the retailer expects to last into next year, Home Depot reported a 14.8 percent drop in its quarterly profit. Consolidated earnings per share are expected to decline 15 to 18 percent for the financial year.

Small building supply companies are also feeling the pinch. BlueLinx, the Atlanta-based building supplies distributor, reported second-quarter revenue that tumbled 21.5 percent.

Heavy equipment manufacturer Caterpillar said its second-quarter profit fell by a whopping 21 percent, largely due to a slowdown in the construction sector. Caterpillar expects profits to pick up as it reigns in costs, and as long as its strong overseas sales continue.

Are businesses being too optimistic? Federal Reserve Bank Chairman Ben Bernanke doesn’t think so. He told Congress on July 19 that the current slowdown in the U.S. housing market has not done significant damage to consumer spending.

Bernanke may be right; if consumers keep on spending, the economy may keep muddling through.

However, deteriorating employment statistics, especially in the areas most affected by the housing bubble, suggest that consumer spending may start to level off.

In California, for example, in June a meager 400 jobs were created statewide, according to state figures. For a state with a population exceeding 35 million, those are extremely weak employment numbers. According to government stats, 942,000 people are currently unemployed in California. The official unemployment rate stands at an above-average 5.2 percent.

“It looks like the beginning of the layoffs in the subprime lending area and real estate,” Stephen Levy, a senior economist of the Center for Continuing Study of the California Economy, said. “This is the housing slowdown finally having an effect on the job numbers.”

The big question is whether California’s worsening employment conditions are an anomaly—or just the tip of the iceberg. Housing-related employment now accounts for one out of every 10 jobs, but from 2001 through partway last year, the real-estate and associated housing industries were responsible, directly or indirectly, for 40 percent of all jobs created. By February, that 40 percent contribution had fallen to 13 percent. Recent trends indicate that percentage may have fallen further.

According to economist Bill Fleckenstein, the housing industry “will soon be responsible for the bulk of job losses.”

Job losses can turn into a vicious cycle leading to reduced consumption, falling corporate earnings, and subsequently more job cuts. Yet, if Bernanke is right, businesses have nothing to worry about. But is he right?

For a different perspective on economic conditions, read “The Coming Storm.”

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