Bellwethers Paint a Mixed Economic Portrait

Earnings season shows a slowdown but no new recession

   

At this point in the latest earnings season, reports from bellwether companies — firms with their fingers on the pulse of the national and global economies — haven’t really told the market anything it didn’t already know.

Indeed, depending on whom you listen to, things are either better or worse than we thought heading into the reporting season.

Much of the eurozone is already in recession, and much of the rest of it is struggling with sluggish growth. Furthermore, panic that Spain could need a bailout or that the euro could collapse has pushed the U.S. dollar up near a two-year high, which, as expected, has been a drag on corporate revenue.

China, meanwhile, has slowed dramatically, in large part because Europe is its largest trading partner. Other major emerging market economies, namely India and Brazil, have decelerated or stalled.

When it comes to global demand, things just ain’t what they used to be.

Yes, the U.S. economy is growing, but not by much. Before earnings season started, economists on average forecast second-quarter gross domestic product to expand 1.2%. On Friday, we learned that it grew at a better-than-expected, but still dismal, 1.5% rate.

So, when all of the above showed up in corporate sales and profits, it was hardly a surprise.

The news at the margins is more interesting — and seemingly contradictory. UPS (NYSE:UPS), the world’s largest package-delivery company, is about as good a bellwether as any, given its global footprint. So, it was certainly worrisome when Big Brown slashed its full-year earnings forecast, not just because of weak international demand but because of slowing in the U.S., too.

UPS said domestic GDP product will grow by only 1% in the second half of the year, well below economists’ average forecast.

Yikes.

But how to square that with what we’ve heard from equally important bellwethers like Caterpillar (NYSE:CAT) or CSX (NYSE:CSX)?

Caterpillar, the world’s largest manufacturer of construction and mining equipment, is on its way to posting record results in 2012. Based on the company’s recent business and prospects going forward, Caterpillar sees no signs of stall speed in the U.S. economy — or a global recession. From CAT’s perspective, it’s nothing like 2008.

And CSX, the massive railroad operator, is seeing softness in the U.S. Sure it is. All railroads are shipping less coal, for example. But it spies no sign of recession in the second half of the year.

More muted growth? Yes. But then that only confirms what the market and economists were already predicting.

And that’s how it’s been with the bellwethers: a mixed bag. DuPont (NYSE:DD) and McDonald’s (NYSE:MCD) were slammed by the stronger dollar. And DuPont also suffered a slip in volume.

But Colgate-Palmolive (NYSE:CL) and Kimberly-Clark (NYSE:KMB), on the other hand, actually increased volume at the same time they raised prices.

Or consider Boeing (NYSE:BA). No one seems to have told its commercial aircraft division that the global economy is in the tank. The company said it delivered more commercial airplanes during the quarter — 150 compared to 118 in 2011.

Boeing’s revenue jumped more than 20%, earnings blew past Wall Street estimates and it raised its full-year outlook.

That’s hardly the sort of thing that happens in a 2008-style global downturn.

The earnings season bellwethers haven’t definitively settled the case for the global or national economy one way or the other. We knew activity was weak. But it hasn’t fallen off a cliff yet. And it doesn’t appear that things will deteriorate too much further.

But they aren’t going to get a whole lot better anytime soon, either.

As of this writing, Dan Burrows held none of the securities mentioned here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/07/bellwethers-paint-a-mixed-economic-portrait/.

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