Berkshire Hathaway 10-Q gives snapshot of weak economy

Photo by Bill Freehling at Berkshire annual meeting

Berkshire Hathaway's second-quarter report offers a snapshot of the U.S. economy during the three months ending June 30, and in many respects it's not a pretty picture.

Berkshire is so diversified that in many ways it's a good indicator of overall economic strength. Warren Buffett has said he's seen few signs of "green shoots" in the economy. That was evident in Berkshire's second-quarter operating earnings.

Berkshire reported $1.78 billion in operating earnings in the second quarter, down from $2.27 billion in the second quarter of 2008 but slightly better than the $1.71 billion in operating earnings from this year's first quarter. Berkshire's operating earnings per Class A equivalent share were below a Reuters estimate.

Gains in the stock market helped push Berkshire's book value to $114.5 billion, an impressive 11.4 percent jump from the value at the end of the first quarter. The stock bump also led to a $1.5 billion paper gain on Berkshire's derivative positions and pushed the company's net earnings to $3.3 billion, an improvement over the second quarter of 2008. Berkshire had $21.4 billion cash on hand as of June 30.

Here are among the telling economic indicators that Berkshire reported in its Form 10-Q (most of the information on operating results begins on page 22 of the report):

• On the big picture: It is expected that the current economic conditions will persist at least through 2009 before meaningful improvements become evident. Berkshire’s operating companies have taken and will continue to take cost reduction actions to manage through the current economic situation.
• On consumers' auto insurance decisions: The weakening economy is also believed to be
  causing customers to raise policy deductibles and reduce coverage in order to save money.
• On housing (see also here): Real estate brokerage revenues declined $57 million (16%) in the second quarter and $124 million (21%) in the first six months of 2009 as compared to corresponding 2008 periods due to declines in transaction volume and lower home sales prices, reflecting the continuing weakness in U.S. housing markets.
• On the manufacturing sector: Nearly all of the businesses in the manufacturing group experienced the adverse effects of the global economic recession as consumers and customers dramatically cut purchases.
• On weak demand for private jet travel (see also here): NetJets owns more planes than is required for its present level of operations and further downsizing will be required unless demand rebounds.
• On the American consumer: Throughout 2008 and in the fourth quarter in particular, as the impact of the economic recession in the U.S. worsened, consumer spending declined. These conditions continued through the first half of 2009. Revenues and pre-tax earnings declined in both the jewelry and home furnishings businesses as a result of the general economic conditions. In general, sales of “higher-end” retail products have suffered greater declines than “popular-priced” items.

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