Subprime Defaults Are Blamed For American Earnings Setbacks

Railroads, chemical producers, and insurance companies are blaming the worst American housing slump in 16 years for their earnings woes.

The second-biggest American railroad, Burlington Northern Santa Fe Corp., said lower shipments of housing products and lumber reduced second-quarter earnings. The third-largest chemical maker, DuPont Co., said slumping demand for kitchen and bathroom countertops was partly responsible for its profit drop. The former insurance unit of General Electric Co., Genworth Financial Inc., said earnings will be at the "lower end" of its forecast this year as mortgage-insurance claims increase.

"The subprime slime is oozing," the president of A. Gary Shilling & Co. in Springfield, N.J., Gary Shilling, who correctly predicted the recession in 2001, said. "As home equity evaporates, that takes out the foundation of strong consumer spending growth, which has been the mainstay of the economy."

American profit growth has been cut by more than two-thirds because of the housing slowdown, according the chief North America economist at Merrill Lynch & Co., to David Rosenberg. Earnings growth is running at 6% and would be 19%, he said. Business is suffering as home sales plunge more than economists estimate and foreclosure filings in America jumped 58% to 573,397 in the first half, according to RealtyTrac Inc.

"Companies that make anything that goes into a home, all the wiring, plumbing, anything related to coatings and fixtures, will certainly be suffering," said Gene Pisasale, who helps manage $25 billion, including DuPont shares, at PNC Wealth Management in Baltimore.

The fallout may be even broader, as dwindling property values erode shoppers' savings. Sales at 53 retail chains rose 2.3% from a year earlier to June from February, down from 3.9% growth a year ago, according to the International Council of Shopping Centers in New York.

Federal Reserve policy-makers have said housing is the biggest risk to the six-year economic expansion. The link with the property market is inextricable as housing and related industries account for almost 25% of gross domestic product, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.

"Clearly it's having an impact," the director of the Harvard center, Nicolas Retsinas, said, referring to housing. "How much of an impact, at this point, is easier to understate than overstate."