June 9, 2012

Europe's economic problems affect wide variety of American companies

By ZACHARY A. GOLDFARB The Washington Post

From manufacturers in the Midwest to upscale retail shops in Manhattan, American companies are feeling the pinch of Europe's economic contraction, holding back recovery in the United States.

click image to enlarge

Auto workers at the Ford Stamping Plant in Chicago Heights, Ill., stack the inner door panel for a Ford Explorer in April. Ford is among the U.S. companies feeling the impact of Europe’s financial crisis.

The Associated Press

‘EXPORTS ARE LIKELY IN FOR ANOTHER ROUGH RIDE OVER THE NEXT YEAR’

WASHINGTON — The U.S. trade deficit shrank in April, but only because a big drop in imports offset the first decline in U.S. exports in five months.

The Commerce Department said Friday that the trade deficit narrowed 4.9 percent in April to $50.1 billion.

U.S. exports, which had hit a record the previous month, fell 0.8 percent to $182.9 billion. Sales of everything from commercial jetliners to industrial machinery declined.

Imports, which also set a record in March, dropped an even faster 1.7 percent to $233 billion.

The trade gap remains wide and could weigh on growth in the April-June quarter. A wider trade gap slows growth because it means the United States is spending more on foreign-made products than it is taking in from sales of U.S.-made goods.

The slip in exports is especially troublesome because it shows the weaker global economy is dampening demand for American-made goods. Export sales declined to Europe, China and Brazil.

“With growth in Asia cooling, Europe in recession and the U.S. dollar strengthening, exports are likely in for another rough ride over the next year,” said James Marple, senior economist at TD Economics.

U.S. exports to the 27-nation European Union dropped 11.1 percent in April. Europe’s debt crisis has worsened in recent months and many economists say the region is already in recession. Europe accounts for almost one-fifth of U.S. exports.

Growth has also slowed in emerging market countries. Exports to Brazil fell 8.2 percent in April.

The U.S. deficit with China increased to $24.6 billion in April. This year’s deficit is running 11.9 percent ahead of last year, when the imbalance hit an all-time high of $295.4 billion. That’s the highest ever recorded for a single country.

The dollar’s strength could benefit U.S. consumers, who are also paying less for gasoline. A stronger dollar makes imports cheaper while making exports more expensive in other countries.

So far this year, the trade deficit, the difference between imports and exports, is running at an annual rate of $603 billion, up 7.7 percent from last year’s total imbalance of $559.9 billion.

Ford, the iconic U.S. car company, says that Europeans are not only buying fewer cars, but are replacing fewer parts.

Kraft Foods, which is behind brands such as Swedish Fish and Dentyne, says sales of candy and gum in Europe are lagging.

And jeweler Tiffany & Co. says fewer European tourists are shopping at its flagship Fifth Avenue store.

Europe is suffering a financial crisis, fueled by dwindling investor confidence in the debts of countries such as Greece, Portugal, Spain and Italy and a beleaguered banking sector. In the United States, analysts are worried less about the financial system and more about the impact on companies outside Wall Street.

For companies in sectors such as food, apparel, hotels and technology, sales and profits will lag if the Europe crisis does not ease. The effect is direct -- as Europeans buy fewer U.S. products and services -- and indirect, as Europe's crisis creates financial uncertainty in the United States and slows economic growth, leading American consumers and businesses to pull back, too.

"The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions," Federal Reserve Chairman Ben Bernanke said Thursday.

The problems in Europe add to the reasons that big U.S. companies, despite record profitability, haven't revved up domestic hiring enough to bring the unemployment rate below 8 percent. Other factors include the lingering wounds in the U.S. economy from the financial crisis and recession, as well as fears that the economy could dip back into recession if an automatic series of tax hikes and sharp spending cuts takes effect at year's end.

The auto sector and its suppliers are among the most exposed to Europe's problems.

"It's a really, really tough environment," Ford chief executive Alan Mulally said recently, comparing the auto business in Europe to what it was like in the United States in 2008 and 2009, just before the auto bailout. "We're not just seeing this on the new-vehicle side, but we're seeing consumers, who are coming in for service, they're not coming in as much and they're not spending as much."

American companies vulnerable to Europe's slowdown have already begun to significantly roll back overhead. Staples, the Framingham, Mass., office-supply chain, sold fewer supplies, particularly computers, in Europe this year and laid off hundreds of overseas employees.

"We expect trends in Europe to remain challenging," Michael Miles, the president of Staples, said last month. "We'll remain, and continue to be, consolidating business units, centralizing functions and reducing layers in complexity with an eye toward lower costs and better execution."

Goodyear Tire & Rubber, headquartered in Akron, Ohio, said that owners of consumer and commercial vehicles in Europe were buying fewer tires and dealers were selling out less frequently as a result. In response, the company reduced production.

Precisely quantifying the impact of Europe's problems on American companies and U.S. employees is impossible. When Europe's economy slows, U.S. companies' European operations are the first to suffer. Still, the spillover effects can be significant.

"As the uncertainty in Europe continues with the unemployment rate hitting 11 percent, that's had a direct impact on stocks here in the U.S. That has a direct relation to a drop in consumer confidence in the past few months," said Alec Gutierrez, an auto industry analyst at Kelley Blue Book. "It's rather significant for the U.S. auto industry in that consumer confidence is highly correlated to consumer auto sales."

There are other impacts, too. U.S. companies with a major presence in Asia say they are facing new challenges because Europeans are importing less from Asian manufacturers.

3M, the Two Harbors, Minn., conglomerate that produces electronics components, reported earlier this spring that its European sales had fallen 6 percent "due to economic softness and ongoing austerity measures in many countries," chief financial officer David Meline said recently.

Yet it was not only 3M's European sales that were affected by the continent's economic decline. Growth also has been more tepid in Asia, in part because Chinese electronics manufacturers are exporting less to Europe. "Export to West Europe will probably not come back this year," said Inge Thulin, 3M's chief operating officer.

Broadly speaking, major U.S. companies sell between 10 and 15 percent of their products and services to Europe, according to research by Tobias Levkovich, an analyst at Citigroup Global Markets.

Industries most likely to be affected include autos and components as well as materials and capital goods, the research showed. Food, pharmaceutical and personal products companies also have a large exposure to Europe, but consumers are less likely to skimp on these products.

Beyond the toll on exports, Europe's problems are increasing volatility in the stock market, exacerbating the skittishness of American consumers and generating additional uncertainty for American firms about the pace of global economic growth.

And given the expectation that many European countries will experience long bouts of austerity, executives do not envision a rebound.

John Chambers, chief executive of networking giant Cisco, said that not only was business in Europe getting worse, but customers around the world were holding back on purchases while they wait to see what happens on the continent.

"I think people are in this uncertain environment and when they're uncertain, unfortunately, you don't spend," he said. "Even the financial institutions outside of Europe are really focused on getting the profitability back in line. ... So clearly, they're keeping their powder dry."

The effect on the U.S. financial system from an escalating crisis in Europe could yet prove severe. But according to a Citigroup analysis, the largest American banks, which have been reducing their exposure to Europe since 2010, now own only $75 billion worth of assets tied to the euro zone, a tiny fraction of their own emergency reserves.

 

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