Buffett’s Berkshire Signals Consumers Spending Drop, Recession Threats

• Warren Buffett’s Berkshire Hathaway signaled just a recent slowdown in US consumers spending.
• Berkshire’s latest earnings showed slowdowns across many of its consumer facing businesses.
• Fears of an economic recession or slowdown have been fueled by rapid inflation and interest rate hikes.

Warren Buffett’s Berkshire HathawayJust signaled the American consumer is feeling the pinch, and that an economic slump or recession could be on its way.

The famous investor’s company is a multi-industry conglomerate with dozens of companies in a variety of sectors, including automotives, manufacturing and industrials, retail, insurance, energy, railroads. The company is widely considered a microcosmic representation of the US economy.

Berkshire published Second quarter earningsOn Saturday, the company revealed that revenues and profits had declined significantly across its consumer-facing business. Here’s the latest:

• BNSF RailwayTransporting consumer goods saw revenues plummet 23%, while volumes fell 16%.
• Berkshire Hathaway HomeServicesReal estate brokerage revenues dropped by 22%, and earnings after tax fell by 60% as the volume of transactions fell and mortgage service revenues decreased. These declines are attributable to theImpact of increasing interest ratesBerkshire explained.
• Manufacturing consumer productsRevenues fell 19%, and earnings before tax dropped 21%. “The declines reflect Forest River’s revenues and those of nearly all our other consumer product businesses are down.Berkshire stated. Forest River revenues dropped 34%, as the number of recreational vehicle sales fell. Higher interest rates, inflation and other macroeconomic conditionsIt added. “Similarly, apparel revenues and footwear revenue fell by 13% as a result of”sluggish customer demand.”
• Manufacturing: Building productsSales at Clayton Homes fell 16%. – Revenues declined by 13%. The first-half new home unit sales fell 20%, with both factory-built and on-site homes falling by around a fifth. “The effects on home mortgage rates in the US have been significant over the last year. Slower demand for our building products and homebuilding businessesBerkshire pronounced:
• RetailingBerkshire Hathaway Automotive’s strong sales of brand new vehicles helped offset an 8% decline in used vehicles. A slowdown in home furnishings led to an 18% drop in aggregate pre-tax profits for the rest division.
• McLaneThe wholesale distributor’s revenue dropped by 3% after increasing by 4% in the previous quarter. The decline is partly due to lower volume.

Berkshire has a very high operating profit. The last quarter saw a growth of 7%, reaching a new record high of $10 billionStrength in other divisions, such as services and insurance, offsets weakness in other parts of the conglomerate.

But the slowdown of Berkshire Consumer businesses may be indicative of a wider decline in consumer spending in the US economy.

Insider was told by James Shanahan of Edward Jones, who is an equity research analyst covering Berkshire: “That is a reasonable conclusion.” He said that the demand for goods was not just affected by higher interest rates, but also by banks’ tightening credit policies, which made it difficult for consumers to get credit during this period.

Berkshire’s challenges in the last quarter underscore the pressures American families are facing. In the last 18 to 24 months, American households have faced a double punch from rapidly rising prices and soaring rates of interest. The cost of essentials such as food, fuel and shelter has increased, while the cost of credit cards, auto loans and mortgages have also gone up. As a consequence, they have tapped into their pandemic funds, accumulated more debt, are saving less each month.

The real problems began when the inflation rate spiked up to 9.1% last summer – the highest in 40 years. In response, Federal Reserve increased interest rates from near zero to over 5%. By making borrowing more expensive, you can discourage spending, investment, and hiring. This can reduce upward pressure on prices. But higher rates can also pull down asset prices, increase unemployment, and even trigger a recession by eroding consumer spending — the engine of the US economy.

The latest indication that American consumers have to make cuts is the weakness of Berkshire Hathaway’s businesses in railroads, real estate, construction, consumer goods, retailing and distribution. The economy may suffer.