Rising costs start to squeeze American businesses

Mysteriously low inflation padded Corporate America's bottom line for years. Now soaring commodity prices and steadil...

Posted: May 2, 2018 3:59 PM
Updated: May 2, 2018 3:59 PM

Mysteriously low inflation padded Corporate America's bottom line for years. Now soaring commodity prices and steadily rising wages threaten to ding record profits.

Major companies including Caterpillar, Halliburton and Harley-Davidson warned in recent weeks of rising costs for everything from steel and crude oil to trucking. President Trump's steel and aluminum tariffs are adding to the pricing headaches.

America's factories have been grappling with inflation this year. Prices for manufacturers have increased for five straight months to the highest since 2011, according to the Institute for Supply Management. Labor shortages and transportation delays are even making it harder for some factories to deliver their products on time.

"We expect steel and other commodity costs to be a headwind all year," Bradley Halverson, Caterpillar's chief financial officer, told analysts during a conference call last week.

Harley-Davidson warned that Trump's steel and aluminum tariffs could jack up its raw materials costs by $20 million this year.

"We have a highly volatile situation," John Olin, Harley-Davidson's chief financial officer, told analysts last week. "That's going to provide quite a headwind for the company over the next several quarters."

Although some inflation may be evidence of a healthy economy, prices could rise to levels that eat into corporate profits, which have been juiced by years of low expenses.

"Inflation is now beginning to show up in the operations of a lot of different businesses," said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

"This is the biggest threat to profit margins of the cycle," Boockvar said.

Related: The recovery from the Great Recession hit a milestone

Evidence of stronger inflation could grab the attention of the Federal Reserve, forcing it to speed up interest rate hikes. Fed officials are expected to acknowledge in a statement on Wednesday that inflation is moving up.

The Fed's favorite barometer of annual inflation, the core personal consumption expenditures index, rose in March to 1.9%. While that's not alarming, it is the highest in over a year and just a hair shy of the Fed's target of 2%.

"There is a very real potential that signs of increased inflation will lead the Fed to accelerate normalization," said Kristina Hooper, global market strategist at Invesco.

Consider the rising number of companies citing "inflation" during earnings calls. The term came up in 99 earnings calls of S&P 500 companies between March 15 and April 30, according to FactSet. That's up from 77 during the same period last year, FactSet said.

The good news is that businesses have a sizable cushion to absorb inflation, thanks to all the money they're saving because of tax cuts. Companies can also offset rising commodity costs by raising prices on customers.

But it's not just commodities fueling the pricing pressure. Trucking costs have been on the rise for months amid a shortage of drivers. Oreo and Ritz maker Mondelez said this week that its profit margins were squeezed by both higher commodity costs and "freight inflation."

"Shortages of trucks and drivers has impacted delivery times," one executive from the food, beverage and tobacco products industry said in the ISM manufacturing survey.

Some industries are also starting to report evidence of rising wages because of worker shortages.

"The labor market is tight," Halliburton CEO Jeff Miller said last week. "Given the level of activity, there will likely be wage inflation and additional pricing will be necessary for cost recovery."

Related: The US dollar is making a huge comeback

Pay raises would be terrific news for Main Street, which has grappled with anemic wage hikes during much of the recovery from the Great Recession.

With the unemployment rate at a 17-year low, economists have been forecasting that companies will be forced to pay more to fill open positions.

Mark Zandi, chief economist at Moody's Analytics, predicted in a report on Wednesday that the US unemployment rate could soon drop into the 3% range. However, he called it "rarified and risky territory, as the economy threatens to overheat."

If the Fed sees signs of overheating, it may be forced to cool the economy off through aggressive rate hikes, which slow growth. The recovery from the Great Recession hit a milestone this week: It's tied for the second-longest economic expansion in American history.

Wage inflation could be seen as a negative for stocks. Paying more to workers threatens to dent corporate profit margins, which grew to record highs thanks in large part to low labor costs.

"What's good for corporate profits was not good for Main Street," Boockvar said. "Now, it's a benefit to Main Street, but at the cost of possibly squeezing earnings."

Wall Street is already on high alert for signs of inflation that could force the Fed to act. Stocks began a months-long period of turbulence in early February after investors learned that wages increased in January at the fastest pace since 2009.

"That shocked markets," Hooper said.

Mississippi Coronavirus Cases

Data is updated nightly.

Cases: 512632

Reported Deaths: 10262
CountyCasesDeaths
Harrison34853555
DeSoto33162432
Hinds32556641
Jackson24830389
Rankin22442402
Lee16238242
Madison14874283
Jones14086247
Forrest13741259
Lauderdale12249324
Lowndes11286193
Lamar10644140
Pearl River9707244
Lafayette8827143
Hancock7835132
Washington7550169
Oktibbeha7204138
Monroe6989179
Pontotoc6970109
Warren6849178
Panola6746134
Neshoba6726210
Marshall6653141
Bolivar6440151
Union633897
Pike5924156
Alcorn5862107
Lincoln5525136
George510180
Prentiss500884
Tippah490282
Itawamba4829107
Scott477499
Adams4766125
Tate4748116
Leflore4723144
Copiah455895
Yazoo455591
Simpson4543117
Wayne442772
Covington432895
Sunflower4299106
Marion4265112
Coahoma4227109
Leake413790
Newton395581
Tishomingo381793
Grenada3775109
Stone365666
Jasper340166
Attala337790
Winston317792
Chickasaw313367
Clay311878
Clarke301195
Calhoun284449
Holmes271289
Smith268952
Yalobusha243747
Tallahatchie231453
Greene224749
Walthall221366
Lawrence217840
Perry213356
Amite209557
Webster205148
Noxubee188642
Montgomery181557
Carroll174441
Jefferson Davis173643
Tunica163239
Benton152639
Kemper144941
Choctaw136527
Claiborne134238
Humphreys131139
Franklin124929
Quitman107528
Wilkinson105939
Jefferson96834
Sharkey65121
Issaquena1957
Unassigned00

Alabama Coronavirus Cases

Cases: 844951

Reported Deaths: 16115
CountyCasesDeaths
Jefferson1161002006
Mobile741871379
Madison53279732
Shelby38325368
Baldwin38068589
Tuscaloosa36009641
Montgomery34482781
Lee25550263
Calhoun22585518
Morgan22451406
Etowah20013517
Marshall18777316
Houston17727425
St. Clair16875358
Limestone16135218
Cullman16044303
Elmore15904294
Lauderdale14968306
Talladega14189299
DeKalb12967269
Walker12020380
Blount10714192
Autauga10517157
Jackson10157194
Coffee9414192
Colbert9334208
Dale9018191
Tallapoosa7254201
Russell707765
Chilton7018170
Escambia6955143
Covington6932195
Franklin6340108
Chambers5783142
Marion5401130
Dallas5285209
Pike5118109
Clarke484986
Lawrence4826129
Winston4780110
Geneva4642136
Bibb434094
Barbour369480
Butler3434100
Marengo342393
Monroe337066
Randolph334367
Pickens333188
Fayette330085
Henry320666
Hale318189
Cherokee317563
Crenshaw260477
Washington256952
Cleburne254460
Lamar251253
Clay250869
Macon244764
Conecuh192762
Coosa184947
Lowndes178168
Wilcox177438
Bullock152645
Perry141840
Sumter139241
Greene130245
Choctaw93228
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