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At first glance, U.S. businesses appear to be doing well in the face of high inflation and rising interest rates. But looking beneath the surface, there are potential warning signs about the economy that are making the country’s top executives a little nervous.
So far, 453 of the top 500 companies that make up the S&P 500 have reported earnings, according to S&P Dow Jones Indices, with about 75% beating Wall Street forecasts in the April-June quarter. is higher than
Given the difficult economic environment they have had to navigate, this is a remarkable display of strength. The country was dealing with the highest inflation in almost 40 years and the Federal Reserve was raising interest rates.
Combined with better-than-expected earnings and hopes that the Fed will be less aggressive on future rate hikes, it has spurred a strong rally on Wall Street.
But management said it faces many uncertainties amid growing fears of a recession. They are not panicking, but they are paying attention.
Here are three signs that could point to potential problems ahead for the US economy.
companies are cutting back on advertising
Historically, when companies feel uncertain about the future, they have cut their advertising budgets, a leading indicator of how companies view the economy.
That’s what happened last quarter.
Social media companies are struggling with slowing ad sales, which is hurting their bottom line. In the second quarter, Facebook’s parent company Meta’s revenue declined for the first time.
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Snap, meanwhile, has sounded the alarm about declining ad sales. Shares of social media companies are down more than 75% this year.
Advertising revenues for traditional media such as The New York Times Company and Gannett are also declining. BuzzFeed has warned that fears of an economic recession will put pressure on its advertising business.
Roku, which makes streaming media players, said in a letter to investors that “the macroeconomic environment has significantly reduced TV advertising spending.”
The company added, “We expect these challenges to continue for the foreseeable future as economic concerns put pressure on markets around the world.”
Companies are cutting costs and hiring
As office workers already know, when companies cut costs or put their expansion plans on hold, it often means potential problems down the road. .
For example, Bed Bath & Beyond has announced a 25% reduction in capital expenditures.
Even with the latest economic data showing the overall labor market is healthy, some companies have begun to delay hiring or announce job cuts.
Job cuts are more pronounced in the tech sector, with companies such as Netflix, stock-trading app Robinhood and e-commerce giant Shopify recently announcing layoffs.
Tech companies have cut about 70,000 jobs so far in 2022, according to Layoffs.fyi, a site that tracks tech sector layoffs.
Automakers are also cautious.
GM CEO Mary Barra recently said the company is “reducing discretionary spending and limiting hiring to critical needs and positions that support growth.”
She added that GM has “modeled several recession scenarios and stands ready to take more cautious action if necessary.”
How we spend money is changing
One of the good things about the economy is that people continue to spend despite high inflation.
However, companies say they are seeing evidence of a change in what people buy, which has led to an excess of unsold inventory.
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Last month, Walmart said it was lowering its full-year profit outlook after higher prices changed consumer habits.
Walmart said customers are spending less money on “common items” as food prices have skyrocketed. .
Walmart is expected to report second-quarter earnings on August 16.
Moreover, manufacturers, from automakers to smartphone makers, continue to have trouble sourcing parts.
Intel Chief Executive Pat Gelsinger recently said, “Across the economy, supply chain issues have limited our ability to meet demand in some regions, while inventories have dropped significantly above normal levels in others. Exceeded.