This shouldn’t come as a surprise to dedicated readers of The Upshot or this blog, but there are a couple of reasons why corporate America looks so healthy these days, and it has nothing to do with the state of the consumer.
The main source of revenue growth for corporations is overseas sales, as Gluskin Sheff’s David Rosenberg points out today (see below.) That plus a ruthless obsession with cost-cutting have been the two drivers of corporate America’s recovery (you could add, too, official government policy to make banks profitable again. Okay, three, three main drivers.) Meanwhile, sales growth is the U.S. is running at barely a 3% clip, Rosenberg points out. It gets back to something we’ve been saying for a while: there just isn’t a lot of demand in the U.S., and because of that, companies aren’t doing a lot of hiring over here.
Do not kid yourself; the American economy is still digging its way out of a deep, deep hole, and it will be some time before it’s capable of supporting the populace on its own. It’ll be interesting to see whether or not the Fed has the brass to turn off the spigots in June when QE2 runs out or, Heaven forbid, actually raise interest rates.
Mark this well: the fact that the Fed still has its fed funds rate at zero, zero, tells you everything you need to know about how the Fed really feels about the economy. Absolutely everything.
The economy will not recover until you see millions of jobs being created, jobs that pay good, solid, living wages, the kind of jobs with which you can raise a family. Until then, it’s all just smoke and mirrors.
LOOKING AT SALES, NOT JUST EARNINGS
We are hearing how great S&P 500 sales are doing so far for Q4 — up 7.7% and beating estimates by the highest margin in a half-decade. We scoured the data as best we could and found that almost all the growth in sales is coming from outside the U.S.A. where revenues are growing at barely a 3% annual rate. The pace is around 20% for foreign-derived sources. So the question is what happens to revenues if the foreign stuff comes under some downward pressure in view of the policy tightening in most emerging markets and the fiscal tourniquet being applied through most of Europe.
The two reasons why companies have had such success in driving their profit growth into a V-shaped recovery has been via an exceptionally robust foreign sales performance and relentless cost-cutting. But you can’t cut costs forever and we are already seeing signs that the downward momentum in unit labour costs is subsiding. On top of that is the surge in material costs, which we have not seen percolate yet, but will surely compress margins from their current five-decade highs.
We should start to get some corporate guidance numbers next week but for the time being we do have the analyst upgrade-downgrade ratios, which has stagnated recently. They are no longer going up and are actually going down in six of the ten sectors. Those with positive momentum include technology and materials. Utilities and consumer discretionary are not screening well at all.