Thanks to the size and the breadth of its market exposure, the performance of US industrials firm Caterpillar (CAT:NYSE) is often seen as providing an insight into the health of the global economy.

The messages from its fourth quarter earnings report (31 Jan) were mixed but ultimately contained more encouragement for global economic prospects than they did for the company itself.

Sales were ahead of expectations, but the manufacturer of heavy machinery missed forecasts with its earnings for the first time since 2020. The shares fell back modestly on the announcement though notably they have, like other companies with sensitivity to the economic backdrop, enjoyed strong gains in recent months.

This reflects increasing hopes of a soft landing, with central banks able to ease up on interest rate hikes before inflicting too much pain on the economy. Since the beginning of October, Caterpillar’s share price is up nearly 60%.

Demand doesn’t seem to be a problem as Caterpillar’s revenue for the three months to 31 December increased 20% to $16.6 billion; for the entirety of 2022 it was up 17% to $59.4 billion. Revenue across all three of its main business areas, construction, mining, and energy and transportation was higher than forecast.

However, the company was tripped up by supply chain issues and higher manufacturing costs which hit margins, particularly in the energy and transportation part of the business. Currency movements, principally the continuing strength of the dollar, also impacted earnings per share to the tune of $0.41. This helped earnings to fall short of the consensus forecast of $4.05 at $3.86.

With the US currency starting to weaken, Caterpillar could get some relief in this area in the first quarter. A drop in margins raises some questions about its pricing power and whether the company is sacrificing some profitability to maintain its market share or is simply facing a lag in passing on higher costs.

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