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The Daily Grind

Corporate and Consumer Trends Cause for Concern

iStock_000007010595MediumJust over a month into 2016, large companies are reporting cutbacks after a tough fourth quarter. Half a dozen companies like Yahoo, who is selling some of its assets, and Johnson & Johnson announced plans to cut thousands of jobs. Other companies like Chevron and Norfolk Southern are cutting back on capital spending. Companies in the S&P 500 index are expected to report that adjusted fourth quarter profits are down 4.1% and sales are down 3.5% from the same time a year ago. The stock market’s fall as well as a uncertain trends in consumer spending have caused much concern among financial leaders and investors about a slowdown in the American economy.

American consumers make up about 70% of the economy in the United States, and they may be saving more than they are spending or simply spending differently than in previous quarters. The economy only grew 0.7% between October and December. As 2015 came to an end, incomes rose slightly in December, but spending fell compared to November. Retail sales were also down according to government figures. American consumers, however, were spending more on their homes last year, purchasing items like roofs, counter tops, and dishwasher and buying a record number of cars. Companies like Starbucks, Ford, and Nike continue to report promising domestic sales this year. Consumer packaged goods companies see signs that consumers in the U.S. are willing to spend a little more on new, brand-name, or higher-quality products. Procter & Gamble reported a 2% increase in organic sales, which is an improvement from a 1% decline the previous quarter.

There is more good news for the consumers: the unemployment rate has gone down to a mere 5%, and young college graduates are reportedly making more money. Temporary staffing is also seeing significant growth. But this increase in income for the American consumer is being saved and not spent: the Commerce Department reported that Americans saved a total of $753 billion in December 2015, a huge increase from the $653 billion saved in December 2014. The timing for the increase in savings is not ideal since the economy does not grow when spending slows.

With the uncertainty presented by the current American economic climate, few executives are anticipating significant growth this year. Industrial and manufacturing companies are particularly diligent about their efforts to cut back on spending. Norfolk CEO James Squires recently told investors that the company is focused on cost reductions, reporting lower coal shipments and higher retail inventories. Heavy equipment and vehicle maker Oshkosh Corp. and U.S. Steel Corp. also reported cautious clients who are wary of taking on large projects before they are certain what the economy will do.

If more jobs are created this year, this could be the key to higher corporate profits. Unemployment continues to shrink, however, there still is major concern among economists that the slowdown is here to stay due to corporate caution and consumer trends.

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