Despite the bullishness of investors, companies appear to be more vigilant of the potential for the economy to start sagging. A survey of optimism among small businesses ticked higher in May but remains close to its lowest level of the past decade. A similar survey of manufacturing businesses from the Federal Reserve Bank of Philadelphia has also edged higher recently but remains sharply lower than two years ago.
Business chiefs have opted for more conservative management strategies, backing away from tactics to lift their stock prices, like repurchasing their own stock or paying large dividends.
Nonetheless, among the small number of companies that have already reported earnings, the trend has been against them. Jeffrey Harmening, the chairman and chief executive of General Mills, said on the company’s earnings call on Thursday that it was starting to see a slowdown in sales, “as consumers are feeling the pinch from inflation.”
FedEx, a bellwether for the economy, reported lower volumes across its business. “We’re all watching the consumer,” noted Brie A. Carere, the company’s chief customer officer.
Policymakers who are trying to engineer a gentle slowdown in the economy will welcome some weakness. But should their efforts falter, earnings could fall faster, leading to layoffs, higher unemployment and the beginnings of a more severe downturn.
“We know that normally the labor market is the last shoe to drop,” Roger Aliaga-Díaz, Vanguard’s chief economist for the Americas, said. “Once you see the labor market weakening, you’re already there.”
One of Wall Street’s most widely talked about recession indicators compares the difference between yields on short-dated government bonds with yields on longer-dated government bonds. Typically, investors require more interest to lend to the government for longer. When that relationship — known as the “yield curve” — inverts, as it did last year, typically a recession follows.
Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, said she hoped that didn’t happen, “but it seems like a lot to ask.”
Source: New York Times
