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At first look, American companies seem to be doing just fine in the face of high inflation and rising interest rates. But look underneath the surface, and there are potential warning signs about the economy – and it’s got the country’s top executives feeling a little bit nervous.
So far, 453 of the top 500 companies comprising the S&P 500 have reported earnings and about 75% did better over the April to June quarter than Wall Street expected, according to S&P Dow Jones Indices.
It’s a remarkable show of strength given they had to navigate a challenging economic environment — a time when the country was dealing with its highest inflation in around 40 years and the Federal Reserve was hiking interest rates.
The stronger-than-expected earnings, along with hopes the Fed won’t be as aggressive with rate hikes going forward, have helped fuel a powerful rally on Wall Street.
But top executives say they are facing lot of uncertainty at a time when there are growing fears of an economic recession. They’re not panicking, but they are being careful.
Here are three signs that could point to potential trouble ahead for the U.S. economy.
Companies are cutting advertising
Historically, when companies are anxious about the future, they cut their ad budgets, making it a leading indicator about how companies view the economy.
That’s what happened in the last quarter.
Social media companies have seen ad sales slow, and that dragged down their earnings. In the second quarter, Meta, Facebook’s parent company, saw its revenue fall for the first time ever.
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Meanwhile, Snap sounded an alarm about declining ad sales. The social media company’s share price is down more than 75% this year.
Traditional media outlets have also seen reduced revenues from ads, including The New York Times Company and Gannett. BuzzFeed warned recession fears will put pressure on its ad business.
In a letter to investors, Roku, which makes streaming media players, said “there was a significant slowdown in TV advertising spend due to the macro-economic environment.”
The company added that it expects “these challenges to continue in the near term as economic concerns pressure markets worldwide.”
Companies are cutting costs – and jobs
As office workers know already, when companies start cutting costs or putting expansion plans on hold, it often means they see potential trouble ahead.
Bed Bath & Beyond, for example, said it would cut its capital spending by 25%.
Some companies are also slowing hiring, or even starting to announce job cuts, even if the latest economic data shows the overall labor market remains healthy.
The job cuts have been more prominent in the technology sector, with companies such as Netflix, stock trading app Robinhood and e-commerce giant Shopify announcing layoffs recently.
According to Layoffs.fyi, a site that tracks layoffs in the tech sector, tech companies have cut almost 70,000 jobs so far in 2022.
Automakers are also growing cautious.
GM CEO Mary Barra said recently the company is “reducing some discretionary spending and limiting hiring to critical needs and positions that support growth.”
She also added GM has “modeled several downturn scenarios, and we are prepared to take more deliberate action when and if necessary.”
Spending habits are starting to change
One of the positives of the economy has been that people have continued to spend even as inflation has been high.
But companies say they are seeing evidence of changes in what people are buying, and that’s contributing to a glut of unsold inventory.
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Last month, Walmart announced it was cutting its profit outlook for the whole year because high prices have changed spending habits.
Walmart said its customers are spending less money on “general merchandise” because food prices have gone up sharply. With more stuff on store shelves, the retailer has had to cut prices on inventory.
Walmart is set to report its second quarter earnings on Aug. 16.
On top of that, manufacturers — from car companies to smartphone manufacturers — continue to having trouble sourcing parts.
“Across the economy, supply chain issues have both limited the ability to meet demand in some areas and driven inventory well above normal levels in others,” Intel CEO Pat Gelsinger said recently.