Warren Buffett's Berkshire Hathaway revealed that consumers are cutting back - and a recession could be the result

• Warren Buffett's Berkshire Hathaway just signaled a slowdown in US consumer spending.
• Berkshire's latest earnings revealed slowdowns in many of its consumer-facing businesses.

Warren Buffett's Berkshire Hathaway just signaled that American consumers are feeling the squeeze, and an economic slump or even a recession may be looming.

The famed investor's company owns scores of businesses across dozens of industries including insurance, energy, railroads, real estate, construction, automotives, manufacturing, industrials, and retail. As result, it's widely seen as a microcosm of the wider US economy.

Berkshire published second-quarter earnings on Saturday that revealed significant declines in revenues and profits across many of its consumer-facing businesses. Here's a roundup:

• BNSF Railway - revenues from transporting consumer products plunged 23% as volumes tumbled 16%.
• Berkshire Hathaway HomeServices - real estate brokerage revenues fell 22% and after-tax earnings fell 60%, as transaction volumes fell and revenues from mortgage services dropped. "These declines were attributable to the impact of rising interest rates, including lower existing home sales and mortgage refinancing demand," Berkshire explained.
• Manufacturing: consumer products - revenues tumbled 19% and pre-tax earnings fell 21%. "The declines reflected lower revenues at Forest River and nearly all of our other consumer products operations," Berkshire said. Forest River's revenues fell 34% as sales volumes of recreational vehicles fell due to higher interest rates, inflation, and other macroeconomic conditions, it added. Similarly, apparel and footwear revenues fell 13% due to "sluggish customer demand."
• Manufacturing: building products - revenues declined 13% with sales at Clayton Homes down 16%. In the first half, new home units sales tumbled 20% as unit sales for factory-built and site-built homes both fell by around a fifth. "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 were shored up by Berkshire Hathaway Automotive, where strong sales of new vehicles offset a 8% drop in sales of used vehicles. Aggregate pre-tax earnings for the rest of the division fell by 18%, partly due to a slowdown in the home furnishings businesses.
• McLane - revenue at the wholesale distributor dropped by 3%, after rising 4% in the first quarter. The decline partly reflected lower unit volumes.

It's worth emphasizing that Berkshire's overall operating earnings grew by 7% to a record $10 billion last quarter, as strength in other divisions such as insurance and services offset weakness elsewhere in the conglomerate.

However, the slowdown in Berkshire's consumer businesses may well signal a broader downturn in consumer spending across the US economy.

"That is a fair conclusion," James Shanahan, a senior equity research analyst at Edward Jones who covers Berkshire, told Insider. He added that it wasn't just higher interest rates that weighed on demand for all manner of goods, but also banks pulling back on lending, which made it harder for consumers to access credit in the period.

Berkshire's challenges last quarter underline the pressures on American households, which have suffered a one-two punch of fast-rising prices and surging interest rates over the last 18 months or so. They've had to pay more for essentials like food, fuel, and shelter, and have seen the monthly cost of their credit cards, car loans, and mortgages rise too. As a result, they've tapped their pandemic savings, racked up more debt, and are stashing away less money each month.

The problems really started when inflation spiked as high as 9.1% last summer, the fastest rate in 40 years. The Federal Reserve responded by hiking interest rates from nearly zero to north of 5% today. Making borrowing more expensive can deter spending, investing, and hiring, which can relieve upward pressure on prices. But higher rates can also pull down asset prices, increase unemployment, and even trigger a recession by eroding consumer spending — the engine of the US economy.

Signs of weakness across Berkshire's railroad, real estate brokerage, construction, consumer products, retailing, and distribution businesses are the latest evidence that American consumers are having to cut back. The economy could suffer the consequences.