Buffett’s Berkshire Reveals Weak Spots, May Stoke Recession Fears

• Warren Buffett’s Berkshire Hathaway is seen as a microcosm of the US economy given its huge size.
• The famed investor’s company reported lower revenues and profits in several divisions last quarter.
• Here’s a roundup of the weak spots, which could foreshadow an economic slump or recession.

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

Buffett’s conglomerate owns everything from insurers and railroads to utilities, real-estate brokers, auto dealers, homebuilders, manufacturers, and retailers. Its latest financial report featured plenty of downbeat commentary, such as the fact that “results of several of our building products, consumer products, service and retailing businesses deteriorated.”

Here’s a roundup of Berkshire’s weak spots last quarter:

• BNSF Railway – operating revenues fell by 12% and earnings by 15%. Revenues from transporting consumer products tumbled 18% as volumes fell 7%, in part because of reduced west coast imports. Revenues from moving industrial products, agricultural products, and coal were also down.
• Berkshire Hathaway HomeServices – revenues and after-tax earnings both fell by 14% last quarter, contributing to a hefty 81% plunge in profits for the first nine months of this year. The real estate giant blamed lower revenues and margins from its brokerage services on a 22% plunge in the number of transactions it has brokered this year. It attributed weaker mortgage-services revenue and margins on a 33% drop in closed transactions this year. “These declines were attributable to the impact of rising interest rates, including lower existing home sales and mortgage refinancing demand,” Berkshire said.
• Manufacturing: consumer products – revenues fell by 2% in the third quarter and 13% in the nine months to September. “The declines reflected lower revenues at Forest River and nearly all of our apparel and footwear operations,” Berkshire said. Forest River’s revenues fell 17% last quarter as sales volumes of recreational vehicles were hit by “rising interest rates, inflation and other macroeconomic conditions.” Meanwhile, apparel revenues slumped by 15% in the first nine months of this year due to “lower volumes from declining customer demand.”
• Manufacturing: building products – revenues fell by 11% and pre-tax earnings slid by 6% last quarter. Clayton Homes’ revenue from home sales tumbled 17% in the nine months ended September. Revenue from Berkshire’s other building-products businesses dropped by 11% over the same period. “The effects of significant increases in home mortgage interest rates in the US over the past year has slowed demand for our homebuilding businesses and our other building products businesses,” Berkshire said.
• Retailing revenues rose by just 1.1% in the first nine months of this year, as strong demand for new vehicles offset weakness in the used-car business, where revenues fell 9% and sales volumes dropped by 5%. Berkshire’s other retail businesses saw a 27% drop in pre-tax earnings as profits plunged by 31% at its home furnishings businesses, which saw “lower customer traffic.”

It’s worth underscoring that Berkshire’s overall operating profits rose by 41% to nearly $11 billion last quarter, as weakness in several of its consumer-facing businesses was offset by strong performances in insurance and other divisions.

Still, Buffett’s company appears to have suffered from mounting pressure on American households, which have faced a double whammy of surging prices and soaring interest rates since last spring.

Many consumers are now spending much more on food, energy, and rent than they were a couple years ago, as inflation hit a 40-year high of over 9% last summer, and has remained close to 4% in recent months. They also face steeper monthly payments on their credit cards, car loans, mortgages, and other debts, after the Federal Reserve hiked interest rates from nearly zero to over 5% in a bid to cool price growth.

The surge in mortgage rates has frozen the US housing market, which likely explains why Berkshire’s real estate brokerage, homebuilders, and building-products businesses are struggling. Meanwhile, financial strains on consumers have probably hurt demand for Berkshire’s apparel, footwear, home furnishings, used cars, RVs, and railroad shipments.

Buffett foreshadowed the challenges, warning in May that most of Berkshire’s businesses would report profit declines this year. Borrowing costs have jumped, and the government is no longer flooding the economy with money to fight the pandemic, he noted.

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

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