Economy Spirals Downward

By Paul Carton

A perfect storm has hit the U.S. economy this quarter, and the odds are high that it will be a while before that storm subsides.

Our latest ChangeWave corporate survey of 3,058 respondents shows the economy locked in an accelerating downward spiral, led by sharply lower third-quarter sales projections, reduced visibility, a worsening job market and a further plunge in business capital spending.

The temporary improvement that resulted from the April/May infusion of $150 billion in U.S. economic stimulus rebates has evaporated.

In addition, our survey shows the U.S. credit crisis getting much worse.

Here is a look at why the U.S. economy's downward spiral appears to have a considerable way left to go.

The Worst Third-Quarter Sales in Years

Only 18% of respondents projected that their company sales will come in above plan for the third quarter -- a four-point decrease from the previous quarter. Thirty-five percent reported that their company sales will come in below plan -- five points worse than previously.
This striking downturn can be seen in the following chart, which shows the last four years of corporate surveys.



As you can see, the percentage of companies projecting below plan sales is nearly double the percentage projecting above plan sales.

Note that you'd have to go back to the depths of the 2001-2002 recession to find such dismal results in a ChangeWave survey.

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Fourth-Quarter Sales Pipeline

There is also reduced visibility going forward. Sales pipeline projections for the fourth quarter show that just 21% of respondents said their company will come in above plan -- two points less than the previous quarter. Twenty-three percent reported they'll come in below plan.

In a further sign of deteriorating business conditions, respondents projected negative capital spending going forward. By a wide margin, more respondents projected a decrease in their company's fourth-quarter capital budget (26%) than an increase (9%).

Credit Crisis Tightens its Chokehold

In the most bearish finding of the survey, the U.S. credit crunch has taken an ominous turn for the worse during the past 90 days.



Twenty-five percent of respondents said it is now harder for their company to borrow money than it was just 90 days ago -- a seven-point jump from the previous survey. Only 1% said it's easier to borrow. And the tightening of credit availability has occurred across companies of all sizes.

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The labor market also shows deterioration. As the following chart shows, our latest survey contains the worst jobs numbers we've reported in years.



A Silver Lining

We did find a silver lining in these grim findings. The results of our survey, which was conducted Aug. 26 to Sept. 4, shows that Fed Chairman Ben Bernanke had it right when he said the slowing economy would help bring down inflation.

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In previous 2008 surveys, we witnessed a dramatic upward movement in price pressures, but the current survey shows a reversal. Only 22% reported prices are rising for their company's products -- down three points -- while the percentage reporting falling prices is up three points to 14%.



Keep in mind, though, that the improvement we're seeing on the inflation front is the result of the further leg downward for the U.S. economy, and, therefore, comes at an enormous cost.

A Perfect Storm

The overall ChangeWave survey results present all the elements of a perfect storm.

The $150 billion economic stimulus package is long since spent, and we're seeing the U.S. economy take another serious leg downward.

The immediate symptoms are the downturn in third-quarter sales, negative capital spending growth, a contracting labor market and reduced fourth-quarter visibility.

However, there's something even more disturbing afoot. The U.S. credit crunch has taken an ominous turn for the worse during the past 90 days, and there are no signs that the situation has begun to stabilize.

With the presidential election about a month-and-a-half away, and no immediate economic catalysts on the horizon, it looks like the U.S. economy's downward spiral will continue.

Paul Carton is the Director of Research for the ChangeWave Alliance. The Alliance is a network of 15,000 highly qualified business, technology and medical professionals in leading companies of select industries. The Alliance is surveyed weekly on a wide range of business and investment research and intelligence topics.

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