The companies that produce goods at the heart of the U.S. consumer economy – SUVs, washing machines, heavy equipment and hamburgers – kept rolling along at the end of 2022.
But corporate executives on conference calls were guarded in their approach Tuesday, simultaneously noting solid demand while still pointing to the need to hold costs down in the face of higher inflation and expectations for economic growth to moderate – but not collapse.
“We’re not doing anything in anticipation of a recession,” said General Motors (GM.N) Chief Financial Officer Paul Jacobson during a call Tuesday, after the company posted better-than-expected results and forecast a better 2023 than analysts expected. “Consumer demand is still holding up.”
Bellwethers including McDonald’s (MCD.N), General Motors, Exxon Mobil (XOM.N), appliance maker Whirlpool (WHR.N) and delivery giant United Parcel Service (UPS.N), posted results that exceeded estimates.
Right now, S&P 500 companies have reported a 4.5% year-over-year rise in revenue. That’s better than what was expected on January 1, but short of last year’s double-digit growth rates, and it is expected to slow in the first half of 2023, according to Refinitiv, motivating the cautious outlook.
“We want to be cautious. That’s why we are talking about a $2 billion cost-cutting program,” said GM’s Jacobson.
GM isn’t alone. Exxon also said it would cut spending even after reporting a record $56 billion profit in 2022, and UPS exceeded estimates due in part to reducing expenses.
However, the hundreds of thousands of technology job layoffs announced by Microsoft, Intel and others are not being mirrored in the rest of the economy. That’s a good sign for the broader economy, according to Lori Calvasina, equity analyst at RBC Capital Markets.
“The lack of major layoffs in the industrial segment of the economy so far supports the soft landing thesis,” she wrote Monday. Calvasina said the market’s recent performance may reflect expectations for a mild downturn followed by a solid recovery in 2024.
The S&P 500 is up 4.6% in January, the best first month for the index since 2019. U.S. economic growth came in at a better-than-expected 2.9% rate for the fourth quarter. It’s early, but the Atlanta Federal Reserve Bank’s first-quarter GDP estimate is currently 0.7%.
The economy’s performance may depend on whether price pressures that have afflicted consumer and business spending start to wane. There is some evidence of that, as the core personal consumption expenditures (PCE) price index rose at a 5% year-over-year rate in December, lowest since September 2021.
Still, that rate is still pressuring margins, numerous executives said on Tuesday. Whirlpool Corp CEO Marc Bitzer said that “inflationary pressures remained stubbornly high” during the fourth quarter, and Caterpillar executives suggested pricing pressures will continue, after expecting them to moderate during the company’s previous earnings call. Cat’s fourth-quarter earnings dropped by 29%.
Even so, the feeling around the economy itself remains relatively positive.
“As we go into 2023, there is going to continue to be inflation,” said Christopher Kempczinski, McDonald’s CEO, on the company’s earnings call Tuesday. “Do you reach a point where maybe it does start to materialize around the consumer? Certainly, consumer sentiment out there remains depressed in many markets. But we’re not seeing it right now.”