GE and 3M lead the parade of concerns about the economy

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Soothing words about the economy were rare on a busy day for industrial earnings reports on Tuesday.

General Electric Co. and 3M Co. technically left their full-year guidance intact for their underlying businesses, but buried the outlook in a bag of concerns. Leaders insist demand remains healthy. “I can’t say an industrial recession is high on my worry list today,” GE CEO Larry Culp said in an interview. Worries about rising interest rates and China’s Covid policies are understandable, but “we don’t have a demand challenge. We have a challenge to meet to meet the requirements of our customers. Still, GE and 3M used the words “uncertain” and “uncertainty” liberally in their earnings calls, and the tone was more muted than it was in January, when industrial companies broadly forecast easing. supply chain and inflationary pressures during the year. At GE, inflation, ongoing supply chain disruptions and the impact of Russia’s invasion of Ukraine are weighing on earnings and cash flow, and the company is now trending down its outlook. . GE also flagged the burgeoning Covid lockdowns in China as an additional item of scrutiny, particularly for its aviation and healthcare businesses. A loss of $434 million for the renewable energy unit in the quarter amid rising costs and falling volumes is particularly out of proportion to the company’s forecast for a loss of $500 million to $700 million. dollars for the full year, and GE now expects to fall short of that target. . Barclays Plc analyst Julian Mitchell has slammed the surprising lack of share buybacks in the first quarter despite a $3 billion clearance announced in early March and recent weakness in GE’s share price.

“Inflationary pressures have become more acute in some areas,” Culp said on the company’s earnings call. The company is “closely monitoring what is happening here in China. We know that we were impacted both from a demand perspective and from a production perspective in the first quarter with the shutdowns, especially in and around Shanghai. How this unfolds is not something we control. I don’t think anyone really does.

3M, meanwhile, said its expectations for auto and smartphone production this year had weakened amid continued semiconductor shortages and geopolitical ripple effects and that industrial production and gross domestic product gains would be slower than expected overall. Overall, supply chain constraints have worsened since its guidance call in February, as has inflation in raw materials and logistics, 3M said. Staffing shortages and patient cancellations are also hurting prospects for elective healthcare procedures in the United States, putting pressure on demand for 3M surgical products. Overall, sales in April got off to a “slow start,” chief financial officer Monish Patolawala said.

Raytheon Technologies Corp. downright lowered its revenue forecast due to the impact of global sanctions against Russia on its commercial aerospace business. The company stands to benefit in the long term from increased defense spending by members of the North Atlantic Treaty Organization, but those dollars don’t magically show up on the income statement overnight.

The cautious message contrasts with the more upbeat tone from industrial companies that reported results earlier in the earnings season, including most U.S. airlines, retailer Fastenal Co. and railroad CSX Corp. But as Wolfe Research’s Nigel Coe commented on Monday, “Early reporters tend to be ahead of the queue for a reason. Distributors, for example, have long been successful in pushing through price increases for manage inflation, and because they are in the business of supply chain management, they have navigated the turbulent environment better than most.The sour tone is also notable as many of the points of concerns lie on the industrial side of the economy.

There will naturally be a slowdown in consumer purchases of physical goods after two years of frenzied spending. To that end, 3M’s consumer unit — which sells everything from post-its to scotch tape — reported organic sales growth of 3.4%, down from 4.9% in the fourth quarter and 7.8% one year ago. United Parcel Service Inc. also announced its results on Tuesday. As the parcel delivery company continued to benefit from price increases and a focus on higher-paying small businesses, total U.S. domestic parcel volume fell 3% in the first quarter — a sign that consumers are returning to stores or maybe spending a little less on goods when they return to move theaters, restaurants and music venues. But there has recently been some debate about whether the industrial expansion trend line might deviate from the consumer and remain more positive. Tuesday’s results test this argument and indicate that it needs to be tightened at best.

Manufacturing companies that are primarily focused on the relatively isolated US economy (for now) are likely to fare better than those with more global businesses, complex supply chains, and greater exposure to currency fluctuations. . There will likely still be positives: supply chain pressures and labor shortages will continue to drive factory automation spending; the recovery of aviation must go further; and the impact of geopolitical disruptions on energy prices will be a boon for the oil and gas sector. But for the sector as a whole, the macroeconomic noise may simply be too loud for selective optimism around certain markets to gain traction. In these times of geopolitical uncertainty, it’s not particularly helpful for these companies to keep adding their own idiosyncratic complexities to their bottom line. 3M, for example, said it was changing its definition of adjusted profit to write off certain “significant” litigation and environmental cleanup costs. The company’s efforts to address the manufacture and disposal of per- and polyfluoroalkyl substances (PFAS) at a Belgian plant caused its unadjusted earnings per share to decline by 26 cents. Parts of the facility have closed amid scrutiny from local authorities, creating rippling disruptions across its operations. Legal costs — including defending 3M against veterans’ claims that it knowingly sold defective combat earplugs — took another 13 cent bite out of profits. Theoretically, separating these liabilities and their impact on earnings creates a clearer picture of the underlying business, but they are an eyesore and reminder of 3M’s massive (and growing) legal headaches. GE, meanwhile, took an $800 million write-down related to the divestiture of its steam power generation business, $200 million of charges related to the impact of the Russian invasion of Ukraine and global sanctions and another $200 million impairment related to a portfolio of Polish mortgages.

It’s always been likely to be a messy earnings season, but companies aren’t giving investors much reason to look through the chaos for better days ahead.

More writers at Bloomberg Opinion:

• The greatest drama is in China, not on Twitter: John Authers

• Industrial concern shifts from supply to demand: Brooke Sutherland

• The Fed is losing control of inflation Story: Lisa Abramowicz

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering transactions and industrial companies. She previously wrote a column on mergers and acquisitions for Bloomberg News.

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