Today’s Upshot column, about rising costs and margin pressures for corporate America, comes with some pretty good timing. Today’s Wall Street Journal has a page-one story about rising prices, right up at the top, four columns. Pricing pressure for a range of commodities is shaping up as one of the themes at Davos (not that anybody there’s going to do anything about it, they’re all too busy trying to get Bono’s autograph (think we’re bitter about not getting press credentials? Think we’re bitter about freezing in New York when we could be freezing in Switzerland with Bono? Of course not.))
The paper interviewed ECB chieftain Jean-Claude Trichet, who warned about rising inflation, and said, without saying it of course, that the central bank will move to contain it, which means raising interest rates. The euro has responded in kind.
Margins are already a big theme amid fourth-quarter earnings reports, and we think it will remain a big theme this year. Companies across a range of industries are talking about it. They always do, but what’s different about the talk this quarter is that companies are finally saying they’re going to be forced to raise prices, no matter the state of the consumer.
From our column:
There are signs that margins may be hitting a plateau. After bottoming out in 2008, operating margins for S&P 500-Stock Index companies have improved steadily, and are near pre-recession levels again. For the fourth quarter of 2010, operating margins for the S&P 500 companies are expected to be 8.8%, according to S&P, down slightly from the third quarter’s level of 8.95%.
Operating margins are expected to average about 9.08% in 2011, according to S&P. But if consumer demand doesn’t drive up sales enough to offset the rising costs, and at this point in the recovery that still appears likely, margins will be capped, and so will profit growth. So companies will be forced to raise prices, cut costs, or both.
Adding surcharges to product prices is one move industrial manufacturer Parker Hannifin Corp. is considering, Chief Executive Donald Washkewicz said. “Because we’re not going to absorb these increases,” he said last week, citing higher raw materials prices. “We can’t absorb them, and we’re just going to have to pass them on.”