Fitch: Most U.S. economic sectors to see only slight gains in 2010

The good news is that most of the major economic sectors will see improvements in 2010. The bad news is that such improvements may not be anything to write home about, according to Fitch Ratings.

For example, Fitch analysts suggest 2009 holiday retail sales will be “mildly positive,” but only because they’ll be compared to weak 2008 numbers. Also, overall 2010 retail sales will be “flat to up modestly” compared to 2009.

And in the broad auto sector, Fitch analysts are predicting a slow recovery that could be drawn out if a double-dip recession hits.

A key point of the Fitch reports is that the analysts say the U.S. unemployment rate will likely peak at 10.5% in 2010.

Even the better news has a hidden downside.

Fitch reported Dec. 1 that free cash flow among U.S. corporations will rise to almost 22% in 2010, up from a 13% decline in 2009 and a 21% decline in 2008.

“Improved efficiencies in both capital and operational spending are expected to lead to strong 2010 free cash flow growth, in spite of generally muted revenue growth expectations,” Michael Weaver, managing director at Fitch, said in a statement.

What Fitch is saying is that many companies have cut costs — cut jobs, reduced pay and benefit allowances, cut or reduced capital expenditures, etc. — in an effort to conserve cash and survive the downturn.

Following are summaries of Fitch analysis of key U.S. economic sectors.

RETAIL
Fitch expects increased stability in 2010 based primarily on improved cash flow and liquidity.

“While revenue growth and financial metrics continue to be weak for many retailers in the near term, of key importance to ratings is what credit profiles will look like as we exit the recession and whether the recession has fundamentally weakened a company’s business or financial profile,” said Karen Ghaffari, managing director at Fitch.

Fitch expects that 2009 holiday same store sales could be mildly positive as weak same store sales in the prior year are anniversaried and retailers needed to clear excess inventories at deeply discounted prices.

In 2010, overall retail sales are anticipated to be flat to up modestly from 2009 levels. Same store sales comparisons remain easy through September 2010 and therefore, same store sales could flatten or show improvement from 2009 levels. Fitch based its retail predictions on high unemployment continuing into 2010, poor consumer credit and continued reduction in home values (which also serves to reduce consumer spending ability). For 2010, Fitch expects the growth in personal consumption expenditures to be 0.3% reflecting expectations for a slow recovery.

HOUSING/REAL ESTATE
Fitch analysts say the housing market will improve in 2010 because “statistical and anecdotal information generally support the premise that a bottom has been reached in the housing market.”

Fitch’s projections of a 14% increase in housing starts, 21% increase in new home sales and a 7.5% increase in existing home sales are increases “off a very low base” in 2009.

“Any recovery is expected to be muted reflecting substantial foreclosures and rising unemployment, although the extension of the national first-time buyer credit will provide impetus to home sales,” Fitch noted.

DURABLE GOODS MANUFACTURING
The Fitch projections suggest a slow or no recovery for the durable goods manufacturers (Whirlpool, Rheem, Trane, etc.) with operations in the Fort Smith area that produce housing-related products. Fitch notes that “home equity borrowing has become harder to obtain, which will limit repair/remodeling expenditures in 2010. Consequently, consumer spending on items related to housing turnover and repair/remodel such as appliances, hard goods, tools and other durable items are expected to grow slowly.”

What’s more, Fitch suggests demand for home-related appliances and products is down to a “new, meaningfully lower revenue level,” with demand and associated production seen in the years prior to 2007 not likely to return for “an extended period of time.”

FREIGHT SECTOR: TRUCK & RAIL
The “remarkable decline” in freight-hauling demand in 2009 will be followed by “modest volume improvements” in 2010 for the U.S. railroad and trucking industries, according to Fitch. Unfortunately for the trucking companies based in the Fort Smith region — including Fort Smith-based ABF Freight Systems and Van Buren-based USA Truck Inc. — demand is not expected to return to pre-recession levels until 2011.

Fitch notes: “Rail and truck volumes reached a bottom during the second quarter of 2009, with mild, but generally positive, growth trends seen since then. Fitch expects these demand trends to carry into next year, with year-over-year volumes turning positive in the first quarter of 2010 as prior-year volume comparisons become much easier. However, the process of recovery is expected to be relatively slow, with overall freight demand not expected to return to pre-recession levels until sometime in 2011 at the earliest.”

Following are highlights from Fitch’s report on the sector.
• “The trucking industry has been in the midst of a ‘freight recession’ since mid-2006, but, as with the railroads, demand declines accelerated heavily beginning late last year.”

• “The less-than-truckload (LTL) sector, in particular, has suffered heavily as demand declines have significantly outpaced capacity reductions. Adding further pressure on the LTL market has been YRC Worldwide’s distressed financial position and the relatively aggressive manner in which several of its competitors have courted its customers over the past year. This has increased the heavy pressure on LTL pricing experienced in 2009.”

• “It is important to note that pricing and capacity in the LTL sector will be heavily dependent upon the ability of YRC Worldwide, the largest LTL carrier, to continue as a going concern. Although the company could avert a near-term bankruptcy if its attempt to overhaul its capital structure out of court is successful, Fitch still has concerns about the company’s longer-term viability.”

U.S. COMMODITY FOOD
Fitch analysts suggest Springdale-based Tyson Foods Inc. will have a better year in 2010 thanks to higher global demand for protein and lower corn, grain and other input costs.

“Although frequently changing import policies by foreign countries cause volatility in export activity, protein exports could increase in 2010 as the global economy continues to improve,” said Carla Norfleet Taylor, director at Fitch. “We are also cautiously optimistic regarding domestic foodservice demand due to Fitch’s belief that restaurant industry traffic can improve in the second half of 2010. If demand does not recover as anticipated, maintaining ample liquidity and conservative financial strategies should limit downside risk for the industry.”

U.S. AUTO SECTOR
“Weak macroeconomic conditions” will result in slow recovery for the domestic auto sector in 2010, according to Fitch. U.S. light vehicle sales are forecast to reach 11.1 million units in 2010, up 7.8% over the estimated 2009 sales of 10.3 million units.

“Factors precluding a stronger bounce from trough levels include high unemployment, pressured consumer discretionary spending, the lost wealth effect from lower housing prices and a higher savings rate. Weak demand from daily rental and pressured municipal finances will also limit any rebound in fleet volumes,” Fitch explained.

Fitch makes several key predictions and comments on the sector.
• “Despite a number of improved variables in the auto industry since the depth of the crisis in 2009, even a rebound in U.S. unit sales to the level Fitch forecasts would leave much of the industry awash in negative cash flow in 2010.”

• “The risk of a double-dip recession or another spike in gas prices remain present and could arrest any market improvement.”

• “The cash-for-clunkers program had a negligible effect on industry volumes in 2009, but nevertheless did have several benefits for the industry. … Coupled with an improved production/demand balance in the industry, higher residual values should continue to support the market as a whole entering 2010. More importantly, the pull-forward of production brought some much needed production and revenue to the crippled supply base, and likely forestalled even more supplier bankruptcies.”

• “Fitch Ratings forecasts a modest recovery for the U.S. automotive suppliers in 2010 based on higher projected light vehicle production in the U.S., the benefits of cost cutting actions in 2009, and recent capital markets transactions which have improved the sector’s credit quality.”

• “Fitch expects U.S. medium and heavy duty truck volumes to improve against the weak 2009 numbers. … Overall, the increase in light vehicle production should bode well for U.S. suppliers, many of which supply auto manufacturers globally. Aftermarket sales should also see an uptick in volumes.”

RESTAURANT SECTOR
Fitch expects improvements in the restaurant sector, but conditions will continue to be tough.

“Due to continued weakness in consumer discretionary spending, same-store sales (SSS) trends for the restaurant industry remain negative and near-term visibility is limited. Nonetheless, Fitch believes personal consumption and consequently restaurant traffic could improve as the economy continues to recover and unemployment peaks during 2010. In the meantime, the maintenance of market share, by offering compelling values along with variety and high quality food and service, will remain a key priority for the industry.”

HOTEL/LODGING SECTOR
Don’t expect gains in the hotel business until 2011, according to Fitch.

“Although the most significant cyclical demand declines related to the recession likely have passed, operating trends are expected to remain weak well into 2010. In light of the ongoing operating weakness coupled with significant pressure on commercial real estate values, Fitch’s industry outlook for lodging continues to be negative.”

Fitch also notes that a “pricing recovery” for the hotel sector is not likely in 2010 and will serve to “constrain a rebound in lodging profits.”

MEDIA SECTOR
Any gains in the media and entertainment sector in 2010 will be “modest and uneven,” Fitch says.

“Fitch believes the worst of the advertising downturn has passed, but the risk of a double-dip recession remains present going into 2010. With political and Olympic ads tightening available ad inventory, Fitch expects ad pricing to stabilize (flat to plus/minus low single digits) in 2010 against weak prior-year comparable periods.”

Also, Fitch analysts note that pay walls will go up and come down in 2010 “as media companies (with print products) experiment with charging users for online content and are ultimately disappointed by the results.”

TELECOM/CABLE SECTOR
Fitch notes that this sector often lags an economic recovery, and pushes any expectations for improved financial results with companies in this sector to 2011.

“Competitive overlap of services is ever-growing for this sector and will continue to materially impact company’s near-term results and long-term prospects. Economic challenges for the sector, particularly related to unemployment and housing-starts are expected to continue well into 2010, also pressuring results,” Fitch noted.

Fitch made predictions on the three basic components of the sector.

Wireless: “Overall total net additions in wireless continued to slow reflecting lower gross additions due to higher penetration, but equally important were factors reflecting the weak economy such as high unemployment. Fitch estimates that the total subscriber base grew by about 5% in 2009 and this will slow to approximately 4% in 2010.”

Cable: “Cable multiple system operators (MSOs) experienced accelerating basic subscriber losses in 2009 with a reduction of approximately 2.75%. Subscriber losses are the result of weak new home growth, but more important, they are the result of competitive erosion from direct broadcast satellite (DBS) and network-based incumbent local exchange carrier (ILEC) video offerings.”

Wireline: “Fitch estimates that aggregate access line losses for 2009 will be approximately 10.5% for the telecommunications sector. Pressure from wireless substitution and weak housing starts continue to be key influences that will remain in 2010. A lessening impact of cable digital telephony erosion of residential access lines was offset by a material increase in business access line losses in 2009. Business and residential access line losses should stabilize in 2010 and continue in the range of 3-3.2 million per quarter, which would represent a yearly loss of approximately 12% with the percentage increase reflecting the declining overall base.”