As the US reporting season rolls on, what have we learnt so far about the domestic economy and the global outlook and what challenges are firms facing?

We have already heard from the US banks that domestic consumers are bearing up despite higher food, energy and housing costs, and the economy is ‘resilient’ for the time being.

CONSUMER STOCKS PAINT A MIXED PICTURE

Credit card issuer American Express (AXP:NYSE) repeated the upbeat message put out by the banks, with card member spending up 21% in the third quarter thanks to ‘continued momentum across goods and services and travel and entertainment spending’.

Total revenues net of expenses were $13.5 billion, up a record 24% on the same period last year, while earnings per share for the quarter were $2.47, comfortably ahead of the $2.38 consensus.

‘We continued to see high levels of customer engagement, acquisitions and loyalty’, said chief executive Stephen Squeri.

Spending on travel exceeded the firm’s expectations, with nine-month revenues up 57% and spending in international markets surpassing pre-pandemic levels for the first time during the quarter, which should bode well for airlines and other travel stocks. American Express can benefit from inflation as it takes a percentage of each transaction it processes.

However, it was a far less rosy picture from appliance maker Whirlpool (WHR:NYSE) which delivered sales and earnings below market estimates and cut its full year guidance blaming economic headwinds and slowing demand.

Revenue for the third quarter was $4.78 billion against an estimate of $5.2 billion while earnings per share of $4.49 fell significantly short of the $5.53 consensus forecast.

The maker of Hotpoint, Indesit and Maytag kitchen and laundry equipment reported double-digit sales declines across most major markets and ‘continued elevated cost inflation’.

As a result it said it would cut production volumes by 35% for the fourth quarter and full year earnings would be around $5 per share instead of $9.50 to $11.50 as previously guided.

Chief executive Marc Bitzer said he saw the difficult trading environment ‘persisting into the first half of 2023’, sending the shares skidding to a two-year low.

Investors in UK retailers AO World (AO.) and Currys (CURY) should therefore keep an eye out when the firms report in November and December respectively.

INPUT COSTS HAVING A MAJOR IMPACT

Aluminium producer Alcoa (AA:NYSE), typically one of the first non-financial companies to report and a bellwether for raw materials stocks, sounded a downbeat note on current trading and the outlook for the rest of 2022.

A combination of lower selling prices, higher energy costs and higher raw material costs have pushed the firm to a thumping third-quarter loss while cash from operations was just $134 million on sales of $2.85 billion, down 22% on a year ago.

In an effort to reduce losses from what it called ‘exorbitant’ natural gas prices, the company slashed production at its Spanish refinery to 50% of its annual capacity while cutting output by a third at its Norwegian facility to mitigate high electricity prices.

Meanwhile, chemical giant Dow Inc (DOW:NYSE) posted a drop in third quarter revenue and forecast fourth quarter sales which were below market estimates as it trimmed production to meet lower demand in Europe, while at the same time trying to manage record levels of inflation in energy and feedstock costs.

If evidence were needed that high input costs are leading to ‘demand destruction’, Alcoa and Dow provided plenty of it and investors in other energy-intensive commodity-producing firms including the UK-listed mining companies should probably take note.

STRONG DOLLAR ALSO CAUSING PAIN

Healthcare and consumer goods giant Procter & Gamble (PG:NYSE) delivered sales of $20.6 billion in the three months from July to September, with underlying organic growth of 7% against market forecasts of 5.5%.

Earnings per share were slightly ahead of estimates at $1.57 against a consensus of $1.55.

The company raised prices by 9% across its range, lowest was 6% in healthcare, highest was 11% in fabric and home care – at the expense of volume sales which declined 3% on the same quarter last year.

Chief executive Jon Mueller didn’t have much to say about market trends, simply commenting that the firm had delivered ‘solid results in a very difficult cost and operating environment’.

The most notable aspect of P&G’s results was the damage being caused by the strength of the US dollar, which knocked 6% off sales meaning reported revenue growth was just 1% for the quarter.

For the year to next June, the company cut its reported revenue growth guidance to between minus 1% and minus 3% due to $3.9 billion of increased costs, $600 million more than forecast
in July due mainly to the strong dollar.

In a similar vein, drug maker Abbott Labs (ABT:NYSE) beat sales and earnings forecasts for the quarter and actually raised its profit guidance for the full year, but the dollar created major headwinds.

Third quarter sales were $10.4 billion, comfortably ahead of the consensus forecast of $9.6 billion but down from $10.9 billion last year whereas without foreign exchange impacts sales would actually been up 1% on the same period last year.

The flip side to the strong dollar is UK firms which operate mainly in North America, such as Ashtead (AHT) and Ferguson (FERG), should enjoy a tailwind to earnings once they are converted back into sterling.

THE TRIFECTA: LABOUR COSTS ARE SURGING

Union Pacific (UNP:NYSE), one of America’s leading transportation companies with a railroad business which covers 23 states across the western two-thirds of the country, is a good benchmark for how well the US economy is doing.

With connections to all major West Coast and Gulf Coast ports, the railroad has around 7,500 locomotives hauling goods across the US as well as up to Canada and down to Mexico day in, day out on trains almost 10,000 feet long.

The volume of goods transported, measured in total revenue carloads, was only up 3% in the third quarter, but thanks to higher prices and fuel surcharges operating revenues were up 18% to $6.6 billion.

As a purely domestic business, Union Pacific doesn’t have to worry about currency headwinds, and it is passing higher fuel costs straight onto its customers, but it is starting to see a margin squeeze from higher labour costs.

In its quarterly results it took an exceptional charge of $114 million ‘related to new, tentative and ratified’ wage agreements with its 12 unions.

Also, in further evidence of the slowing US economy, the company reduced its forecast for volume shipment growth this year to 3% against 4% to 5% previously.

The latest US Institute of Supply Management survey of purchasing managers shows business sentiment has not only given up all its post-pandemic gains but is almost below its pre-pandemic level.

More worrying, if the downward trend continues it will soon break below the 50 level which means the economy is no longer expanding and is starting to contract instead.

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