Gathering fears of a recession in the United States sent shares tumbling before the weekend, a miserable end to a week of disappointing financial results and gloomy predictions on future growth from corporate America.
Caterpillar, the maker of diggers, diesel engines and power generators – one of the most important bellwethers of global industry – said many of its markets were already in recession, and predicted that the economy as a whole would follow suit if the Federal Reserve did not act to cut US interest rates.
Wachovia, the fourth-largest bank in the US, also dismayed the market, with below-forecast results that showed its first drop in profits for six years due to rising bad debts among its mortgage customers.
Investors worried that problems in the US housing market were starting to have spillover effects, and that the summer credit market crisis may still cause aftershocks on Wall Street. Corporate earnings, which had been forecast to be modestly positive in the third quarter, have in fact shown profits falling on average, and company after company has suggested that forecasts for the rest of the year have been too high.
The Dow Jones industrial average closed last night down 2.6 per cent at 13,522.02, and there was more pressure on the dollar, hitting another record against the euro and standing last night above $2.05 to the British pound. The drop on the Dow was the worst since the early part of the credit crisis on 9 August, when the European Central Bank began a round of emergency cash injections to kick-start the debt markets.
It was Caterpillar's use of the word "recession" which really attracted attention, even though the company predicted US economic growth of 1.5 per cent in 2008. That forecast, it said, already assumed further interest rate cuts, which the financial markets expect to begin when the Fed meets next on 31 October.
Jim Owens, Caterpillar's chief executive, said many of the industries most important to its profits in the US were already in recession, notably housebuilding and the market for truck engines.
And while the company tried to put a positive spin on its outlook for 2008, it reduced its earnings forecasts for the rest of this year and issued guidance for next that was below Wall Street's hopes. "We expect 2008 to be the sixth consecutive year of sales and revenues growth, despite a US economy near to, or even in, recession," it said.
Bill Strazzullo, market strategist at Bell Curve Trading in Boston, said: "A company like Caterpillar should be a poster child for global growth and the benefits of the weak dollar. It makes you question: Is global growth really that strong?"