Buffett’s Berkshire reveals weaknesses, may raise recession fears

Buffett’s Berkshire reveals weaknesses, may raise recession fears

Warren Buffett.
Reuters/Rick Wilking

  • Berkshire Hathaway, owned by Warren Buffett, is seen as a microcosm of the American economy due to its huge size.
  • The popular investor company reported lower revenues and profits across several divisions in the latest quarter.
  • Below is a summary of weaknesses, which could portend an economic downturn or recession.

Warren Buffett’s company is so large and diversified that it is widely viewed as a miniature version of the American economy. Berkshire Hathaway reported weakness at several subsidiaries in its recent third-quarter earnings, which could herald a broader economic downturn or even a full-blown recession.

Buffett’s group owns everything from insurance companies and railroads to utilities, real estate brokers, auto dealers, home builders, manufacturers and retailers. Its latest financial report included a lot of downbeat comments, such as the fact that “results for many construction products, consumer products, services and retail businesses deteriorated.”

Here’s a summary of Berkshire’s weaknesses last quarter:

  • BNSF Railway – Operating revenues fell by 12% and profits by 15%. Consumer product transportation revenues fell 18% with volumes down 7%.This is partly due to lower West Coast imports. Revenues from transporting industrial products, agricultural products and coal also decreased.
  • Berkshire Hathaway Home Services – Revenue and after-tax profits fell by 14% in the fourth quarter, contributing to a significant 81% decline in profits for the first nine months of this year. The giant real estate company attributed the decline in revenues and margins from financial brokerage services to a 22% decrease in the number of transactions it mediated this year. The report attributed the weak revenues and margins of mortgage services to a decrease in closed transactions by 33% this year. “These decreases are due to the impact of higher interest rates, including lower existing home sales and demand for mortgage refinancing.” Berkshire said.
  • Manufacturing: consumer products -Revenues fell 2% in the third quarter and 13% in the nine months to September. “The decreases reflect lower revenues at Forest River and virtually all of our apparel and footwear operations.” Berkshire said. Forest River’s revenues declined 17% last quarter due to a hit to recreational vehicle sales volume “Rising interest rates, inflation and other macroeconomic conditions.” Meanwhile, apparel revenues fell by 15% in the first nine months of this year due to… “Lower volumes due to lower customer demand.”
  • Manufacturing: building products – Revenues decreased by 11% and pre-tax profits decreased by 6% in the fourth quarter. Clayton Homes’ revenue from home sales fell 17% in the nine months ended in September. Revenues for Berkshire’s other building products businesses fell 11% during the same period. “The effects of large increases in mortgage interest rates in the United States over the past year Slowing demand for our homebuilding businesses and other building products businessesBerkshire said.
  • Retail Revenue rose just 1.1% in the first nine months of this year, as strong demand for new cars offset weakness in its used car business, where revenue fell 9% and sales volumes fell 5%. Berkshire’s other retail businesses saw a 27% drop in pre-tax profits as profits fell 31% in its home furnishings business, which saw “Low customer traffic“.

It’s worth noting that Berkshire’s total operating profit rose 41% to nearly $11 billion last quarter, as weakness in many of its consumer-facing businesses was offset by strong performance in insurance and other divisions.

However, Buffett’s company appears to be suffering from mounting pressure on American households, which have faced the double whammy of rising prices and rising interest rates since last spring.

Many consumers are now spending more on food, energy and rent than they did two years ago, with inflation reaching its highest levels in forty years when it exceeded 9% last summer, and remaining close to 4% in recent months. They also face steeper monthly payments on their credit cards, car loans, mortgages and other debt, after the Federal Reserve raised interest rates from nearly zero to more than 5% in an attempt to cool price growth.

The surge in mortgage rates has frozen the housing market in the United States, which likely explains the difficulties faced by Berkshire’s real estate brokerages, homebuilders, and building products companies. At the same time, financial pressures on consumers may have hurt demand for Berkshire’s apparel, shoes, home furnishings, used cars, recreational vehicles and rail shipments.

Buffett predicted the challenges, warning in May that most Berkshire companies would see their profits decline this year. He pointed out that borrowing costs have jumped, and the government is no longer flooding the economy with funds to combat the epidemic.

“That period has ended,” he added. “It’s a different climate than it was six months ago.”

While the US has weathered the recession so far, Berkshire’s earnings suggest there are some cracks in the economy.

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