A Switzerland-based plumbing company could be ground zero for the next US recession - and the signals it's flashing are worrisome
- Plumbing and heating supply giant Ferguson is forecasting much slower growth in the coming months, and a UK analyst says that's a bad sign for the housing market and the US economy.
- The slowdown in sales growth for Ferguson means US housing sales aren't getting any healthier, according to Russ Mould, the investment director for AJ Bell. That's a worrying sign for the overall health of the economy.
- Housing sales dropped last year as prices stayed high and mortgage rates climbed, and big drops in housing sales are often a sign of impending recessions.
Fading sales growth for a plumbing and heating supply giant is a sign that a weaker US economy is coming down the pipe, according to Russ Mould, investment director for UK-based AJ Bell.
That company, Ferguson, says its revenue growth is slowing. It didn't pinpoint specific causes, but Mould said the implications are clear.
"The only logical conclusion here is that the US is now seeing a slackening in growth too, since America represents some 80% of group sales and 90% of profits," he wrote. Ferguson's other markets are the UK and Canada.
Mould's view is that the company's weak sales stem from the sluggish US housing market. Because a home is such major purchase, it's one consumers are hesitant to make if they're unsure of their job or financial prospects. That helps make home sales a major indicator of the health of the economy.
In December, UBS said that significant housing declines have foreshadowed nine of the 11 post-World War II recessions in the US.
Ferguson, which is headquartered in Switzerland, said its organic sales rose 6.5% over the six months that ended on January 31. But for the full fiscal year it expects to finish with growth of just 3% to 5%, which means there will be a big dropoff.
It reported a total of $14 billion in revenue over the last six months. Ferguson stock, which trades over the counter, fell almost 8% Tuesday.
Half of Ferguson's US sales are tied to residential housing, and its forecast adds to a pile of worrying data about the housing market. The Commerce Department said Tuesday that housing starts fell in February. That came days after weak construction and manufacturing data.
The reports last week contributed to an inversion in the yield curve, which is considered a major warning signal for an impending recession.
And there were plenty of reasons to worry last year, too. Housing sales have slackened as mortgage rates gradually rose along with interest rates, while limited supply pushed prices higher. Both have left would-be buyers on the sidelines.
Mould, whose firm manages $58 billion in assets, notes that mortgages rates have come down in recent months alongside interest rates. He writes that that downturn, which can be seen in this chart, should be stimulating demand and helping sales.
But Ferguson's forecast is evidence that demand isn't getting any better, a sign the economy isn't picking up.
"Ferguson's rather cautious outlook today suggests this might not be the case and perhaps this is one reason why the US Federal Reserve is now treading carefully with regard to any future interest rate increases," he wrote.