Clouds Darken Over the Smokestack Sector

The first wave of the recession has been evident for some time as lenders, home builders, retailers and automakers pulled back the curtains on their crumbling businesses.

But now the second wave of the downturn has begun to take shape, as industrial companies cut production, lay off workers, warn about waning profits or seek bankruptcy protection.

The U.S. industrial benchmark, General Electric (GE Quote), was among the first to show signs of stress as its financing operations struggled in the troubled credit markets, with consumers beginning to default on loans. Since December, industrial firms that ran the gamut from chemical companies like DuPont (DD Quote) to equipment-makers like Caterpillar (CAT Quote) to metal-producers like Alcoa (AA Quote) have begun to slash jobs, cut executive compensation, curtail production and warn of impending losses.

At the extreme end, European chemical-maker LyondellBasel said on Tuesday that its U.S. operations and one European holding company would file for Chapter 11 to restructure debt, citing "a dramatic softening in demand for our products and unprecedented volatility in raw materials costs."

While some industrial stocks had held up relatively well, experts are predicting more pain ahead as the recession drags on at least through the end of 2009. Robert Shapiro, chairman of Sonecon and former undersecretary of commerce under President Bill Clinton, says the outlook for the industrial sector is "definitely discouraging," as demand from businesses and consumers alike "is certain to remain depressed for some time, both U.S. and global."

As consumers and businesses pulled back on demand, overall industrial production slumped at a 6% annual rate during the third quarter. The auto industry's woes helped push capacity utilization for raw steel production down to 65.2% in the week ended Nov. 8, down from 88.5% a year earlier. As a result, steelmakers have started to shutter 17 of the country's 29 blast furnaces, according to a recent report by consulting firm Booz & Co.