Businesses on the frontline of the economy say cracks are forming

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In recent days, executives from the biggest tech, retail and consumer products companies have all tried to answer questions about the state of the economy, which is on the brink of recession.

In Silicon Valley, earnings from tech companies like Google and Apple generally beat expectations, but executives said there were signs of a slowdown in consumer spending. Consumer products giant Procter & Gamble said it expects a tougher 2023, even as it continues to raise prices. Mastercard said spending was flat among the wealthy, but slowing among low-income customers.

Meanwhile, Walmart and Best Buy have warned that when they report earnings in August it will be worse than expected, largely due to changes in consumer habits.

“We’re seeing strong growth,” said Amazon Chief Financial Officer Brian Olsavsky. “But we are aware that things could change quickly.”

Four times a year, the largest publicly traded companies report how much money they are making or losing, in addition to future prospects. These reports provide useful snapshots of how consumers are spending, a key metric for predicting economic performance.

But much like government economic indicators released last week, including a drop in gross domestic product and a slight increase in consumer spending, corporate earnings show the U.S. economy is in a weird spot. People are still spending their money, but inflation means more of it goes to gasoline and basic necessities and less to categories like clothing and electronics. Unemployment remains low, but some companies are slowing hiring and a few are starting to lay off workers outright.

The Federal Reserve raised rates again last week in an effort to make it harder for people to borrow more money and keep spending, which aims to slow inflation and stabilize the economy. But it’s a delicate balance as some companies are already reporting warning signs.

“As high inflation has continued and consumer sentiment has deteriorated, customer demand within the consumer electronics industry has weakened,” the chief executive said Wednesday. of Best Buy, Corie Barry, echoing comments two days earlier by Walmart chief executive Doug McMillon that food and fuel prices are reducing people’s ability to buy clothes and other goods.

This dynamic suggests that Americans are starting to be careful about what they spend their money on.

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Thomas Combs, a 52-year-old small business owner who lives in Dallas, said he’s “completely changed” the way he spends money, including cutting back on treats like gourmet coffee and ice cream. He said repairing his car has also become more expensive, and he knows how difficult it would be to upgrade his car or move to another house.

“I don’t like to see companies posting record profits in the last two quarters and then being told about supply chain or refining issues or whatever is to blame for rising consumer prices” , Combs said. “You become pessimistic but realize that you have to live with it if you want to survive in today’s America.”

The biggest tech companies released numbers that were less pessimistic than Wall Street had feared, and the stock prices of Apple, Amazon, Google and Microsoft all rose after their earnings reports were released. Coupled with big profits for oil companies due to soaring gas prices, the results helped propel the S&P 500, a collection of the largest companies’ stock prices, to its best month since November 2020.

“People were nervous, there was some kind of bomb lurking, and it never showed,” Tom Essaye, president of Sevens Report Research, said of the technology benefits. “So far we’ve kind of dodged a bullet.”

But that hasn’t stopped the tech company’s executives from wringing their hands.

Apple accessories like watches and home appliances saw sales decline due to supply issues and the “macroeconomic environment,” chief executive Tim Cook said Thursday. He added, however, “I’m not an economist,” and pointed out that sales of the company’s all-important iPhone were still strong.

Apple’s customers tend to be middle- and upper-income earners and early adopters, consumer tech analyst Carolina Milanesi said, meaning the company is less likely to be hit hard by uncertainty. economic.

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“The main message is that if Apple starts feeling soft, that means really bad news for everyone,” she said. “That would mean the rest of the market would contract further.”

On Tuesday, Google’s chief financial officer, Ruth Porat, said “some advertisers” had opted out of buying Google ads, but its two main customer groups – travel and retail – were still seeing growth. “We use the term uncertainty because we think it’s the best way to characterize what we see,” Porat said.

Amazon reported better-than-expected results and the company said consumer demand was still strong, but the company also said it would be more cautious about hiring. (Amazon founder Jeff Bezos owns The Washington Post.)

After reporting that it got overwhelmed with pandemic hiring last quarter, the company said Thursday that the staffing problem was largely fixed by attrition in May. Looking to 2023, Olsavsky said the company plans to continue limiting warehousing and logistics expansion to “better align with expected customer demand.”

There is no massive drop in consumer spending, said Edward Jones analyst Brian Yarbrough, but rather mixed results in different areas. At Walmart, where many low-income Americans shop, customers are prioritizing their grocery budget over extras, and the retailer is preparing for it.

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Large companies reported a mix of positive and negative results. Pfizer has exceeded expectations with its coronavirus vaccine and covid-19 treatment drug Paxlovid. Southwest Airlines said demand was strong and revenue would be higher in the third quarter than even before the pandemic. UPS shares fell after the shipping company missed expectations for the number of packages it would ship in the quarter. General Motors also fell, blaming parts shortages for its inability to sell as many cars as it would have liked.

Consumer spending rose again in June, but largely because things cost more and wages aren’t rising as fast, so people are cutting back on their savings when shopping, the data shows. released Friday by the government’s Bureau of Economic Analysis. . Some categories, like clothing and electronics, are down, and people are spending a greater proportion of their money on housing, food and gas.

America’s largest corporations, which sell billions of dollars worth of goods and services each week, have a clear picture of how the economy is doing. Some of them openly say that consumers have cut back on spending due to high prices and economic concerns.

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Shopify, the Canadian e-commerce company that grew into a $170 billion giant during the pandemic but has seen its growth plummet as people return to in-store shopping, said on Tuesday it would lay off 10% of its workforce.

The company had bet that the surge in online shopping as people were forced to stay home to avoid covid-19 would fundamentally change the way the retail industry worked, but now saw that the growth of the e-commerce had returned to normal levels, chief executive Tobi Lütke said in a blog post on the company’s website.

“It is now clear that this bet did not pay off,” Lütke said.

Other big tech companies have also slowed hiring and told employees to expect to do more with fewer resources. Google CEO Sundar Pichai told workers earlier this month that the “sunnier days” were over. During the company’s quarterly public conference call last week, Porat said the slowdown in hiring would be more “pronounced” in 2023, signaling that the company believes a downturn could last more than a few months.

Amazon could also cut hiring in its technology and engineering divisions in the event of a significant economic downturn. “We will continue to increase the number of people,” Olsavsky said, “but we are very attentive to the economic conditions that may arise.”

Some Americans say it’s a new normal. Shannon Villa, a 32-year-old Amazon warehouse worker who lives in Birmingham, Alabama, said he was careful about recognized expenses. He has three kids and a mortgage, but still managed to take a few trips this summer.

“I can’t control the price of eggs or milk. [If] it goes up it just goes up. I still need it for the family,” he said in a message. “The gas is rising, I still need it. I can’t afford to complain. I just have to adapt.

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