European Troubles Starting to Hit U.S. Shores

It seems like forever since I started talking about Europe and their debt crisis.  It's taken awhile, but their problems are now starting to affect the U.S.

In Good News From Europe, Though I Have Trouble Seeing It, I stated that Eurozone spending accounts for 41% of S&P 500 revenue.  During the earnings pre-announcement season, I noted one company that I follow blamed failure to close a few large deals in Europe for their earnings warning.  Now with Q1 results being reported, we learn that IBM and Intel are having trouble in Europe as well.  From Bloomberg, Intel, IBM See Sales Stall as Europe Crisis Crimps Orders

Intel Corp. (INTC) and International Business Machines Corp. (IBM), computer-industry bellwethers, posted the slowest sales growth in more than two years last quarter as the European slump weighed on orders. 

IBM’s revenue climbed 0.3 percent to $24.7 billion in the period, while Intel sales rose 0.5 percent to $12.9 billion. That was the smallest increase for either company since the third quarter of 2009, when the U.S. economy was just emerging from recession. Even so, Intel predicted a pickup in sales for the current quarter. 

The two technology giants are seeking growth in emerging markets while coping with a slowdown triggered by the European debt crisis. The personal-computer market, which contracted in the U.S. last year for the first time since 2001, also is hurting demand for Intel’s processors. IBM, meanwhile, is more focused on expanding earnings per share, rather than pursuing less-profitable orders.

The question now is this a one time event like Intel believes or the beginning of a new trend.  Looking at Europe, I'm not optimistic.  From the Telegraph, Debt Crisis: as it happened, April 18, 2012

14.03 Italy has cut its 2012 economic growth forecast and moved the goalposts on its balanced budget rule.

The Italian economy is now expected to contract by 1.2pc this year from 0.4pc previously, The revision was largely expected, following a series of leaked reports in the media. 

The Italian government, which had vowed to balance the budget in 2013, now expects a shortfall of 0.5pc of GDP next year, and a balanced budget in 2014. In a statement, the Italian government said:

Despite the progress made, there is still a long way to go in a context that is more favourable but still characterised by elements of uncertainty.

Analysts that I've read have been optimistic on Italy because it does not have a budget deficit.  However with the third largest national debt load after Japan and the US, a shrinking economy threatens to overwhelm it's ability to pay back its debts.   Additionally, analysts were also hoping that Prime Minister Mario Monti would be successful in reforming Italian labor laws in the hope of making them more flexible.  After months of negotiating, it appears that optimism may have been misplaced as labor unions do not want to change the status quo.

Moving on to Spain, it has been some time ago when Spain announced that they would not reduce their budget deficit to 3.5% of GDP this year.  After what were surely some intense conversations, Spain agreed to target a 5.3% deficit.

Eurozone is Trending Down

In the U.S., car sales are one quick means to measure how consumers feel.  I'm was not sure this applies in Europe too, but Bloomberg recently dispelled any qualms I had with this headline, European Car Sales Fall to 14-Year Low as Economy Stalls (emphasis mine)

European car sales fell to a 14- year low last month, with Fiat SpA (F), Renault SA (RNO) and PSA Peugeot Citroen (UG) posting the biggest drops, as the region’s sovereign- debt crisis caused economic growth to stall. 

Registrations in the 27-member European Union plus Switzerland, Norway and Iceland fell 6.6 percent from a year earlier to 1.5 million vehicles, the lowest figure for March since 1998, the Brussels-based European Automobile Manufacturers’ Association said today in a statement. First- quarter sales dropped 7.3 percent to 3.43 million vehicles. 

France and Italy, Europe’s second- and third-biggest auto markets, shrank by more than 20 percent. The regional drop was alleviated by growth at German carmakers, such as Volkswagen AG. (VOW) Paris-based Peugeot is among auto manufacturers forecasting an industrywide contraction of 5 percent in Europe this year. 

“The extent of the beat for Germans is a bit surprising, as well as the extent of the downturn for the French,” Adam Hull, a London-based analyst at WestLB AG, said by phone. 

French car sales plummeted 23 percent to 197,774 vehicles, while Italian registrations dropped 27 percent to 138,137, according to the association, or ACEA.

The bolded items caught my eye.  If people don't want to buy big ticket items due to uncertainty, its understandable that companies are uncertain too.  I will continue to watch the reports from other companies to see if this is simply the beginning.


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