Expectations for the U. S. Economy Are Worsening
Euler Hermes ACI economic analysis says the world economy engine is slowing.
(PRWEB) March 14, 2006
U. S. business profits are continuing to slow steadily and some industry sectors are in a weakened condition, according to economic analysis by global trade credit insurer Euler Hermes ACI. As a result, expectations for the future of the economy are worsening, and a rise in business insolvencies is expected for 2006.
Business profits as measured by operating earnings per share of the S&P 500 companies rose by a sharp 24% in 2004. But when the results for all of 2005 are tallied, expectations are that S&P 500 earnings will have grown only about 15%, and consensus forecasts for earnings growth in 2006 and 2007 are only about 8% and 5% respectively. Meanwhile, several industry sectors are currently in a ‘crisis’ state, most notably the automotive and airline sectors.
“The automotive industry is being affected by rising labor, pension, and healthcare costs, and a poorly conceived product range,” said Euler Hermes ACI Chief Economist Dan North. “Also, the airlines are being besieged by labor and fuel costs, and a price war among the top carriers.”
In 2005, however, the U. S. economy was more resilient than expected in the face of higher oil prices and interest rate hikes, according to Euler Hermes economic data tracking. This pleasant surprise was attributed to a very accommodating budget policy in response to hurricane damage, a strong housing market, low interest rates, and a strong consumer. In 2006, U. S. growth should fall below 3% in the wake of greater budgetary restraint, a tightening monetary policy, and higher material and labor costs. Analysis from Euler Hermes predicts U. S. GDP could fall to 2.5% in 2007.
By continuing to raise interest rates, the Federal Reserve has migrated from an accommodative to a restrictive monetary policy. “The outlook is more questionable since the tightening monetary policy will certainly influence the economy for several more quarters to come,” North said. “Furthermore, the Fed is expected to continue raising rates through March and perhaps even May, so the economy could be facing this headwind until well into 2007.” He added that the Fed raising short-term rates has also inverted the U. S. Treasury yield curve, a very strong predictor of a future slowdown.
The economic analysis suggests that now might be a good time to look at what the future could hold for the business environment, North concluded. “An examination of the risks on the horizon might well be sobering, but it’s best done now while the environment is robust, and before those risks have a chance to emerge.”
The Economic Outlook publication is available upon request from Euler Hermes ACI. For more information on Euler Hermes ACI products and services, visit www. eulerhermes. com/usa (http://www. eulerhermes. com/usa).
Euler Hermes is the worldwide leader in credit insurance and one of the leaders in bonding and guarantees. With 5,400 employees in 41 countries, Euler Hermes offers a complete range of services for the management of customer receivables. The North American subsidiary (Euler Hermes ACI) is headquartered in Owings Mills, MD. For more information visit www. eulerhermes. com/usa (http://www. eulerhermes. com/usa).
Euler Hermes, a subsidiary of AGF and a member of Allianz, is listed on Euronext Paris. Standard & Poor’s rates the group and its principal credit insurance subsidiaries AA-.
These assessments are, as always, subject to the disclaimer provided below.
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(410) 753-0652
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