Pedestrians carry Nike and Allbirds shopping bags in New York's SoHo neighborhood on October 24, 2021.
Nina Westerveld | Bloomberg | Good pictures
That's a shift from recent years, when consumers spent at breakneck speed — and at higher prices — to boost corporate earnings to new records. But faced with falling demand, more price-sensitive consumers, easing inflation and better supply, some sectors are now forced to see profit growth without rising prices.
The answer across industries is to cut costs, whether through layoffs or buyouts, or simply becoming more efficient. Executives have spent the past several weeks selling these cost-cutting plans to Wall Street.
Nike last week cut its annual sales growth forecast and unveiled plans to cut costs by $2 billion over the next three years. Companies including Spirit Airlines, a slowdown in domestic bookings and higher costs, are offering salaried workers, while toy maker Hasbro announced it will lay off 1,100 employees as it struggles with sluggish toy sales.
“I think companies are better at controlling costs than maintaining pricing power,” said David Kelly, chief global strategist at JP Morgan Asset Management.
“Commodity companies don't have the pricing power they did with the pandemic and some hotels and travel. [industries] – They don't have the pricing power they did in the immediate post-Covid period,” he added.
Sales growth for companies in the S&P 500 has averaged 2.7% this year, according to mid-December analyst estimates published by FactSet. This is down from the previous year's average growth of 11% in 2022. Meanwhile, net margins are forecast to decline slightly for the year to 11.6% from 11.9%, FactSet said.
“Companies are extraordinarily committed to maintaining margins,” Kelly said.
FedEx, for example, maintained its adjusted earnings outlook for its fiscal year ending May 31, despite its weaker sales forecast. The company announced cost-cutting measures last year.
Consumer spending is largely resilient, but growth is slowing.
According to the MasterCard Spending Pulse survey, holiday retail spending, which excludes vehicle sales and travel expenses, rose 3.1% this year from Nov. 1 to Dec. 24 over the same period in 2022. 7.6% Those figures are not adjusted for inflation.
Traction is not felt equally across industries.
According to a MasterCard survey, restaurant spending rose 7.8% during the holiday season, outpacing overall gains. Starbucks executives, for one, say sales are still strong and customers are choosing more expensive drinks, driving sales and profits.
According to the survey, consumer spending on apparel and groceries rose by 2.4% and 2.1% respectively. However, spending on jewelery fell by 2.4% and spending on electronics fell by 0.4%, the report showed.
Airline executives said summer demand was strong as travel recovered from pandemic shutdowns, but fares are expected to decline from 2022, with capacity constrained by staff shortages and flight delays. The latest inflation report from the U.S. Department of Labor showed that airfares fell 12% in November from a year earlier.
John F. in New York on December 23, 2023. Passengers walk with their luggage at Kennedy International Airport.
Geena Moon | Good pictures
Southwest Airlines CEO Bob Jordan told CNBC on the sidelines of an industry event in New York earlier this month that the airline's fares are still higher than last year, despite some discounts during off-peak travel times. The carrier has scaled back its capacity growth plans for 2024 and plans to use more aircraft during peak demand periods.
“Next year's capacity changes are all about upgrading the network to match new demand patterns,” Jordan said. “In some cases, peak and trough [of demand] are far away.”
Automakers have been losing their pricing power following years of sluggish demand and low supply of new vehicles that have led to record North American profits for the Detroit automaker and foreign firms such as Toyota Motor.
The average transaction price of new vehicles rose from less than $38,000 in January 2020 to more than $50,000 in early 2023 – an unprecedented 32% increase during that time. Prices are up, but down more than 3.5% through October to about $47,936, according to the most recent data from Cox Automotive.
“Consumers are definitely being pushed back,” said Ozung Kwon, equity strategist at Bank of America, noting some of the prices.
“But we think consumers are healthy,” he continued. “Consumers' balance sheets still look outstanding.”
There is much to cheer about the state of the US consumer – the job market is still strong, unemployment is low and spending remains resilient.
But consumers have increased their savings and credit card debt, with balances reaching $1.08 trillion at the end of the third quarter, according to the New York Federal Reserve. credit card Crime rates are above pre-pandemic levels.
That dynamic is driving back some consumer spending at a time when companies were already struggling with spending adjustments as pandemic fears subsided. Consumers who spent heavily on things like home improvement during the Covid lockdowns shifted their money to services like travel and restaurants when restrictions were lifted.
With airlines, many retailers and others forecasting a strong holiday season, the question is whether consumers will continue their spending habits in the coming months, which is typically a low season for shopping and travel, especially when paying off their recent purchases. That means a challenging period for companies to pass on price hikes to consumers.
Analysts are upbeat about next year's earnings, despite companies unable to raise prices and sales growth slowing.
Analysts expect earnings for S&P 500 companies to rise 6.6% from a year earlier in the first quarter of 2024, FactSet data showed. Sales are forecast to increase by 4.4%. Both growth metrics represent annual improvement and quarterly improvement. Net margins are expected to increase by 11.8%.
Bank of America's Kwon said he expects earnings to improve despite a slowdown in U.S. economic growth due to the company's strategic changes.
“Companies are really focused on what they can reduce,” he said. “Companies are hiring and overcapacity. They've stopped doing that.”
— CNBC's Michael Wayland contributed to this article.
Don't miss these stories from CNBC PRO:
