Berkshire’s Pederson Says U.S. Businesses Scaling Back
Berkshire Hathaway Inc. (BRK/A)’s furniture- rental unit saw a slowing in demand from business clients in the second quarter, indicating that firms are curbing spending on projects amid less optimism about the U.S. economy.
Demand is “simmering compared to where it was at the beginning of the year, when it looked like the recovery, at least from our perspective, would have been pretty robust,” said Jeff Pederson, the new chief executive officer of Berkshire’s CORT Business Services Corp., the world’s largest provider of rental furniture. “It’s not flat-lining, by any stretch of the imagination, but it has slowed down.”
Warren Buffett, who built Omaha, Nebraska-based Berkshire into a company valued at more than $200 billion selling products from ice cream to insurance, uses results at the firm’s more than 70 operating units to gauge the health of the economy. He highlighted CORT’s rebound in a February letter to shareholders as an example of how businesses not tied to housing have recovered since the recession that ended in 2009.
U.S. executives tapped into a record pile of corporate cash at the beginning of the year, driving spending on plants and equipment to an all-time high. Cash held by companies in the Standard & Poor’s 500 Index (SPX) fell 1.4 percent to $1.01 trillion in the three months ended March 31, the first decline in four years, according to data compiled by S&P.
Uncertainty about the European debt crisis and sources of economic growth may have slowed second-quarter spending, Pederson said in a phone interview last week. The U.S. economy is expected to grow 2.2 percent this year, the median estimate of 70 economists surveyed by Bloomberg.
“I’ve heard nothing from our business-to-business clients that would indicate that it’s a cash issue,” he said. “It’s more cautionary. Where is the growth really going to be by year end?”
CORT businesses that provide furniture for student housing, trade shows and events have grown, said Pederson. The Chantilly, Virginia-based company also offers services to help companies relocate employees. The Berkshire unit has worked with about 80 percent of the firms in the Fortune 500.
“The commercial furniture rental business kind of a pretty good indicator of whether American business is involved in a lot of project growth,” he said. “If they’re involved in a lot of project growth, it usually means that they’re a bit bullish on what the future holds.”
The Institute for Supply Management’s factory index unexpectedly fell to 49.7 in June from 53.5 a month earlier, the Tempe, Arizona-based group’s report showed today. Readings less than 50 signal contraction, and the median forecast of economists surveyed by Bloomberg called for a decline to 52. Estimates of the 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 in the previous year.
Pretax earnings at CORT and Berkshire’s truck-trailer rental company XTRA Corp. climbed to $155 million last year from $13 million in 2009. The furniture-leasing company took a “hammering caused by the severe economic recession” and cut staff as its managers focused on expenses rather than expansion, Berkshire Vice Chairman Charles Munger wrote in 2010.
CORT grew as Pederson’s predecessor Paul Arnold made more than 50 acquisitions. Arnold retired yesterday after a 40-year career at the company, including two decades as CEO.
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