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Reports Identify Most Stressed Sectors in Corporate America

For These Still Struggling Industries, Space Demand Should Be Weak
January 11, 2012
New reports issued this past week shine a spotlight on corporate segments experiencing continued stress, providing commercial real estate owners with an idea of where they can expect soft demand through 2012.

In Standard & Poor's opinion, companies in media and entertainment, consumer products and health care are among the most troubled in the U.S.

And according to Challenger, Gray & Christmas, job cuts were dominated by the government and financial sectors in 2011, and those sectors are likely to continue to struggle in 2012.

Despite positive manufacturing numbers from around the world, sluggish consumer demand and high unemployment continue to weigh on the media and entertainment, consumer products and health care sectors, S&P reported.

These sectors had the highest levels of risk among S&P's lists of distressed companies, weakest links (companies rated 'B-' or lower with negative outlooks or ratings on CreditWatch with negative implications) and potential bond downgrades (investment-grade or speculative-grade companies with negative outlooks or ratings).

S&P identified 126 companies in these three sectors that meet at least one of the above criteria. These key points emerged from S&P sector stress report:
  • Of the 126 companies in the most stressed sectors (media and entertainment, consumer products and health care), 28 companies are on more than one of the three lists, indicating even greater vulnerability.

  • The three most stressed sectors account for some of the largest contributions to negative bias in the speculative-grade segment. The media and entertainment sector leads with 15% of the total, followed by the consumer products sector at 9% and health care at 8%. However, the three sectors' current negative bias levels are significantly lower than the long-term averages.

  • As of Dec. 20, the three stressed sectors accounted for about 42% of the issuers listed as weakest links and eight of the 39 total defaulters across all sectors in 2011.

  • The default rates for the media and entertainment and health care sectors have been falling over the past 12 months, in line with the decline in the overall U.S. speculative-grade default rate. However, the default rate for the consumer products sector has been hovering around 1.5% through most of the year.

  • The default rates for media and entertainment and consumer products were 1.9% and 1.6%, respectively, as of November and the overall speculative-grade rate was 2.03%. There were no defaults in the health care sector during the past 12 months.

While planned job cuts announced by U.S. employers declined in December to the lowest monthly total since June, global outplacement firm Challenger, Gray & Christmas said Washington is under immense pressure to cut spending and it looks like every deal to extend tax cuts, raise the debt ceiling and pass the budget will come with measures to cut spending, which can be expected to result in more job cuts.

"Additionally, there are still proposals to make massive cutbacks within the United States Postal Service. While its budget is not taxpayer funded, it has been ravaged by the growth of electronic mail. Involuntary layoffs at the Post Office could total as much as 120,000, according to one plan, with another 120,000 positions lost through attrition," said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

"In the financial sector, the economic troubles in Europe will continue to be a cloud hanging over Wall Street in 2012. While temporary fixes have been put in the place for the time being, there is still heavy risk of a collapse, which would ripple quickly through the global banking system. On the home front, many banks are still saddled with millions of foreclosed properties worth a fraction of their original values," Challenger added.

The government and financial sectors were not the only areas to see increased job cuts. Continued weakness in consumer spending helped contribute to a 32% increase in retail job cuts, which totaled 50,946 in 2011, up from 38,751 in 2010. Aerospace and defense contractors felt the fallout from government cutbacks. These employers announced 34,759 job cuts last year, an 82% increase from 19,150 the previous year.

"While several other sectors saw increased job cuts, the pace of downsizing in most industries is still well below recession levels. But even as job cuts remain low in most sectors, employers still appear reluctant to add jobs. Net job gains picked up at the end of the year, after dipping in the third second and third quarters, but the pace of job creation is still too slow to make a significant dent in the number of unemployed," said Challenger.

"Job creation is likely to remain slow and steady in 2012. Washington seems paralyzed when it comes to enacting policies that might spur job growth. Even if they were to pass some legislation that could help, the impact is rarely immediate and is typically smaller than anticipated.

"In the end, there may be little government can do to jumpstart job growth. It really comes down to demand and, right now, consumers and businesses around the world simply are not spending. So, there is little demand and, therefore, no compelling reason to ramp up hiring," said Challenger.

"In addition to soft demand, two other factors could contribute to slow job growth in 2012: an immobile workforce and a mismatch of skills. Among employers that are hiring, many are complaining that it is difficult to find people with the right skills. This may seem counterintuitive in a labor market with more than 13 million Americans unemployed, but the problem is that many job seekers are unable or unwilling to move to where the jobs are being created," said Challenger.

"Even if job seekers are willing to relocate, they may not have the skills employers are seeking. The areas hiring now and in 2012 will require specialized knowledge. Information technology, specialty manufacturing, nursing and commercial construction are areas that are growing, but all of them require specialized skills. Even areas like long-haul trucking, which is in desperate need of drivers, requires a certain level of training that many job seekers are unwilling to pursue. As a result, job creation will be weakened."

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