American consumers are still eager to spend, giving companies that cater to them room to push through more price increases. That’s a key takeaway midway through earnings season.
Companies in the consumer staples segment, which includes such household names as Coca-Cola, Procter & Gamble and Hershey, stood out, with 90.5% reporting first-quarter results through May 2 that beat analyst expectations, versus 80% for the entire S&P 500. The consumer discretionary category, which includes automakers, restaurants and hotels, also outperformed, with sales up 9.2% for the quarter, compared with 3.5% for the entire universe of companies. This has implications for the Federal Reserve as it continues its most aggressive cycle of interest-rate hikes in 40 years to corral inflation.
In presentations, executives at companies such as Starbucks, Ford Motor and Hilton said revenue got a boost from price increases. Their ability to pass on higher operating costs to customers is allowing them to keep raking in profits, too, even as they sound an increasingly cautious note about the future: Net-income margins for the sector were little changed from a year ago, data compiled by Bloomberg Intelligence show. “Companies still have pricing power for the most part, and that does not seem to be slowing down yet,” says Ellen Hazen, chief market strategist and portfolio manager at F.L. Putnam Investment Management.
The pointillistic picture of the US economy that’s discernible from the results of consumer-oriented companies is similar to the one painted by official data. Gross domestic product rose by an annualized 1.1% in the first three months of the year after adjusting for inflation, according to US Commerce Department figures published on April 27. But personal consumption expenditures were up 3.7%, the most in almost two years.
The latter is a consequence of the best job market in decades. The employment cost index, a broad gauge of wages and benefits, advanced 1.2% in the first three months of 2023, according to US Labor Department figures released on April 28. The increase—the first quarterly acceleration in a year—was all the more notable because it happened against a backdrop of falling job openings and a drumbeat of layoff announcements.
In remarks to reporters after announcing a quarter-point rate hike on May 3, Fed Chair Jerome Powell warned that inflation will take time to cool, and he pinned higher corporate profits and margins on an imbalance between supply and demand, which he expects to improve. “As goods pipelines have gotten back to normal, so we don’t have the long waits and shortages, I think you will see inflation come down and corporate margins come down as a result of the return of full competition,” Powell said.
The resilience of the US consumer is especially remarkable considering households have endured 5 percentage points of interest-rate hikes in little more than a year that have raised the cost of credit, including mortgages and car loans. Despite the barrage, inflation remains lodged well above the Fed’s 2% target. “It is striking how many of these large corporations noted that consumers are continuing to accept inflation, a dramatic departure from the norm over the past 20 years,” Stephen Stanley, chief economist at Santander US Capital Markets, wrote in a May 1 note. “Many of the executives reporting these results wondered at the strength in revenues in the face of such sharp price increases.”
McDonald’s Corp. reported first-quarter sales and profit that bested analysts’ projections, saying it benefited from “ strategic menu price increases” in the US. Many consumer staples companies told a similar story. “Most of the revenue increase is price mix,” PepsiCo Chief Financial Officer Hugh Johnston said after the snack and soft-drink giant published first-quarter results that also beat expectations. “The consumer continues to hold up well in our category.”
Things look a bit different outside the consumer sectors. Although first-quarter earnings for S&P 500 companies broadly have come in better than expected, they’re on track to fall more than 4% from a year earlier, notching a fourth consecutive decline, according to Bloomberg Intelligence.
While inflation hasn’t overwhelmed households’ desire to spend, Americans are also beginning to save more. Personal savings as a share of disposable income rose to 5.1% in March, up from a low of 2.7% last June. That doesn’t bode well for profits, according to Robert King, director of research at the Jerome Levy Forecasting Center in Mount Kisco, New York. For him, the latest GDP report contained another red flag for profits: Business investment in the first quarter was largely unchanged from the same period last year, advancing a mere 0.7% on an inflation-adjusted basis. That’s concerning, as it’s often the case that companies sacrifice future growth when they pare back spending on things like new equipment or research and development. A drop in business investment is often a harbinger of a recession, too.
“Those two factors are the key things to watch,” King says. “One is that consumers have turned a corner and are now saving more, rather than less. And the other is that businesses are responding to the peaking of aggregate profits by cutting back on capital expenditures.”
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