The Wall Street Journal - 16.08.2019

A2| Friday, August 16, 2019 ***** THE WALL STREET JOURNAL.

Estimated 3Qgrowth Reported2Qgrowth*

Eventhoughsecond-quarterS&P500earnings

havebeencominginbetterthanexpected,profits

aregenerallyonpacetocontractfromayearearlier.

Consumer staples

Energy

S&P500earnings-

growthestimates

3Q

4Q

*Second-quarter results

from 465 company reports

Source: FactSet

-20% -10 0 10

10

• 
  

0

5

%

JF MAMJ J A

Health care

Financials

Utilities

Communications services

S&P

Consumer discretionary

Information technology

Industrials

Materials

Real estate

up better as Americans main-

tain solid spending and as em-

ployment remains strong.

Although U.S. growth is

slowing, it is holding up better

than in other parts of the

world. The latest economic

figures out of China showed

its jobless rate in cities hit a

record. Europe is also stum-

bling as Germany said its

economy shrank last quarter.

A healthy U.S. economy is

important, but corporate prof-

its are the real engine behind

stock market gains, said Yana

Barton, a portfolio manager at

Eaton Vance. Stocks tend to

meet less resistance if earn-

ings growth is robust, keeping

valuation metrics such as

price/earnings multiples in

check. Instead, they drifted

last month as high as 17.5,

which is considered somewhat

expensive, she said.

Without profit expansion,

stocks could be more suscepti-

ble to bouts of volatility, espe-

cially as investors have grap-

pled with trade tensions for

more than a year, along with

signseconomicgrowthinthe

U.S. is slowing.

The S&P 500 has slumped

4.5% in August, including

Wednesday’s 2.9% drop and

Thursday’s 0.2% increase,

leaving the broad index

roughly where it was a year

ago. And moves in the bond

market have signaled that an

economic slowdown could be

on the horizon.

Ms. Barton said stocks

would have a catalyst to move

higher if the U.S. and China

were to reach a trade deal or

if economic data improves.

The S&P 500, for example,

logged one of its best days in

months Tuesday after the U.S.

delayed some tariffs.

But that decision doesn’t

fully alleviate concern or the

cost pressures that have al-

ready mounted on companies,

analysts and investors said.

Analysts’ latest revisions

show the S&P 500 faces a 3.2%

contraction in third-quarter

earnings from a year earlier,

according to FactSet. And for

the fourth quarter, the S&P

500 is now on track to in-

crease profits by less than 4%,

down from the nearly 10%

growth rate analysts expected

at the beginning of the year.

Cisco Systems provided

revenue and earnings expecta-

tions for the current quarter

that were below analysts’ fore-

casts late Wednesday because

of a decline in business from

service providers and China.

Macy’s lowered its outlook,

pointing to a buildup in inven-

tories. Tariffs on some Chinese

apparel imports are expected

to strain the department-store

chain further.

Shares of Cisco fell 8.6% on

Thursday, while Macy’s de-

clined 3.8%, extending its drop

this week to 17%.

Scotch-tape maker 3M Co.

cut production and reduced in-

ventory, citing waning demand

from China. While those

moves helped it beat second-

quarter profit estimates,

shares are down 18% this year.

Tariffs aren’t the only fac-

tor to blame for the weaker

outlooks.

Second-quarter profit mar-

gins across all S&P 500 sec-

tors are down from a year ear-

lier, according to FactSet.

Rising labor and commodity

costs, as well as a strong dol-

lar, have dented profits.

Caterpillar cut its profit

forecast last month, blaming

higher labor costs, as well as

trade tariffs. Its shares have

fallen this year after notching

steep declines this month.

“There’s still a reset in mo-

tion that will result in earn-

ings being lower than what’s

expected,” said Terry Sandven,

chief equity strategist at U.S.

Bank Wealth Management.

“It’s one reason why we think

the market goes sideways

from here.”

through the beginning of May
thought that the economy was
going to get better in the back
half of the year, trade war was
going to sort of settle, cer-
tainly not escalate,” Eastman
Chemical Chief Executive Mark
Costa said on an earnings call
last month. “And now we’re
just in a very different world
where I don’t think that’s
true.”
Investors are aware that
surprises to the upside are
fairly common with earnings
reports because analysts tend
to be conservative with esti-
mates. The first and second
quarters were no different in
that regard.
And companies such as
Walmart Inc. have offered rel-
atively optimistic outlooks for
the rest of the year as they
take market share from strug-
gling competitors.
Still, analysts said investors
shouldn’t take the slowdown
in earnings growth lightly, es-
pecially as the outlook for
later quarters dims.
Hanging over the stock
market is a diverging U.S.
economy. Manufacturing has
slowed for four straight
months while services, which
include companies in the
health-care, finance and res-
taurant industries, have held

ContinuedfromPageOne

Earnings

Estimates

Worsen

quarter growth. Its GDPNow
real-time growth estimator
now stands at 2.2%, up from
1.9% in the Aug. 8 estimate.
Still, U.S. industrial output
fell last month as the manufac-
turing sector continued to
struggle. Manufacturing out-
put, the biggest component of
industrial production, fell 0.4%
in July from a month earlier,
the Federal Reserve said
Thursday. That helped tug
down broader output across
factories, mines and utilities
last month.
Trade-related headwinds,
weak global growth and a
strong dollar that crimps de-
mand for U.S. exports have
taken a toll on manufacturers
this year, weighing on the U.S.
expansion. U.S.-China trade
tensions rattled markets this
week, and another market sig-
nal—falling bond yields—con-
tributed to the volatility.
The yield on the 30-year
Treasury note fell to a fresh
record low Thursday as de-
mand surged for long-term
Treasury securities amid rising
concerns about the risks of de-
celerating global economic
growth. The 30-year Treasury
yield settled at 1.985% while
the benchmark 10-year Trea-
sury yield ended at 1.534%, the
lowest in three years.
The longer-term trend in
manufacturing production
shows the sector is pulling
back: Output has fallen more

ContinuedfromPageOne

than 1.5% since December 2018.

Thursday’s data did little to

change the picture for Federal

Reserve policy makers. The Fed

cut interest rates in late July

by a quarter-percentage point

in a pre-emptive strike to cush-

ion the economy from a global

slowdown and trade tensions,

though Chairman Jerome Pow-

ell said then thatconsumption

“is the main engine driving the

economy forward.”

The reports Thursday pro-

vided fresh evidence of a split

between strength in consumer-

related sectors of the U.S. econ-

omy and weakness in the man-

ufacturing sector.

The U.S. experienced a simi-

lar situation in early 2016,

when indicators pointed to a

possible recession: Stock-mar-

ket declines, a slowdown in job

creation, falling corporate prof-

its and contraction in a factory

sector weakened by a strong

dollar. Yet the economy pulled

through and continued to grow.

Still, Stephen Stanley, chief

economist Amherst Pierpont

Securities, said that while the

current situation looks similar

in many ways, “The trade situa-

tion is more potent” now.

Although manufacturing ac-

counts for a small share of

gross-domestic product, the

sector is sensitive to shifts in

global demand, making it a

bellwether for the broader U.S.

economy.

In the second quarter, the

U.S. economy slowed but still

grew at a solid 2.1% annual

rate as strong consumer

spending offset a drop in busi-

ness investment.

“The consumer is still

healthy,” Macy’s Inc. CEO Jeff

Gennette said Wednesday.

He added, however, that

challenges could curtail con-

sumer spending down the

road, including the possibility

of higher prices stemming

from tariffs on some Chinese

imports.

While American shoppers

were a bulwark to signs of

weak growth at the start of the

third quarter, recent con-

sumer-confidence surveys

show households’ optimism is

based on the strong labor mar-

ket and wage gains.

Slowdowns in the manufac-

turing and housing sectors

Retailsales

201 7’ 1 8’ 19

• 2
  
  
  • 1
  
  
  
  

0

1

2 %

Note: Data are seasonally adjusted. 100 represents 2012 levels

Sources: Commerce Department via St. Louis Fed (retail sales); Federal Reserve (industrial index)

Excludinggas Industrial-productionindex

’ 1 8’ 19

102

104

106

108

110

2017

RisingRetail,FallingFactories

Retailsaleshavegrownforfivestraightmonths,while

manufacturingisdownsincehittingapeakinDecember.

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The RealRealInc. said de-

partment-store discounts had

hit prices of preowned

women’s apparel. A Business

& Technology article on

Wednesday about the com-

pany incorrectly said in two

instances that purchases had

been hit.

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U.S. NEWS

“don’t bode well for a diversi-

fied and well-supported econ-

omy in the second half of the

year,” said Lindsey Piegza,

chief economist at Stifel Nico-

laus & Co., adding “I don’t

think the consumer is going to

carry the economy alone.”

Some analysts say that ris-

ing labor costs, weak earnings

and companies’ limited pricing

power could prompt them to

rein in hiring, a factor that

could hurt consumers’ spend-

ing power. At best, earnings

across the companies in the

S&P 500 will grow 1.5% this

year, FactSet projects, far short

of estimates for growth of

more than 6% that analysts ini-

tially forecast in January.

“If the corporate sector is

getting pinched, they will react

by trying to reduce costs and

inevitably that impinges on la-

bor,” said MFR Inc. economist

Joshua Shapiro.

Signs of labor-market strain

appeared in Thursday’s data.

Nonfarm labor productivity

rose at a solid 2.3% annual

pace in the second quarter, but

hours worked declined at a

0.4% annual rate, the Labor De-

partment said. That marked the

steepest drop in workers’ hours

since the third quarter of 2009.

Kent Lowe, owner of Integ-

rity Heating & Cooling in

Charlotte, N.C., said the com-

pany saw an unusual slow-

down in July, a surprise be-

cause the summer is usually

the busiest time of year.

“When I see a slowdown like

that, I immediately am looking

at do I have too many people

on staff, because we’re about to

go down into a slower time of

year,” said Mr. Lowe, who has

18 full-time employees.

—Suzanne Kapner and

Daniel Kruger contributed to

this article.

Consumer

Spending

Increases

WASHINGTON—President
Trump has made the strong
economy the central selling
point of his presidency, and
his advisers believe it is the
key to winning a second term.
But this week’s damaging
economic developments—re-
sulting in fresh warnings of a
possible impending reces-
sion—threaten to complicate
that message 14 months be-
fore the election.
Mr. Trump and his advisers
say publicly they aren’t wor-
ried. White House officials add
that Mr. Trump—even as he
continues to heap scorn on the
Federal Reserve and its chair-
man, Jerome Powell—will keep
touting the economy, including
during a Thursday night rally
in Manchester, N.H.
“The economy is phenome-
nal right now,” Mr. Trump said
Thursday during an interview
with a New Hampshire radio
station. “With a normalized

interest rate, we’re doing phe-

nomenal. We had a couple of

bad days. But we’re going to

have some very good days.”

While he reacts to eco-

nomic developments on Twit-

ter, Mr. Trump has been pri-

vately assuring advisers that

he isn’t bothered by recent

drops in the stock market, ac-

cording to two people who

have spoken to him lately. And

while more economists are

predicting a recession in the

next year, the threat isn’t con-

sidered a certainty.

The question for Trump’s

campaign is whether he can

continue to project such opti-

mism through November 2020

in an uncertain environment.

“The president has spent

his entire first term trumpet-

ing the positive effects of the

economy,” said Kevin Madden,

a Republican strategist who

previously worked on the

presidential campaigns of Mitt

Romney and George W. Bush.

“So when we start to see indi-

cators that maybe it’s begin-

ning to soften, that has to be a

core concern for them from a

messaging standpoint, but

also from the voter attitude

standpoint.”

Adding to Mr. Trump’s chal-

lenge, Mr. Madden said, is that

the president’s own policies

are bolstering concerns about

the state of the economy. “A

great deal of the uncertainty

and volatility is being driven

by the White House’s trade

policies,” he said.

Economic experts say that

Mr. Trump’s trade war with

China has alarmed Americans

about the future of trade, and

that the changing cost of do-

ing business is causing trepi-

dation about investment.

Trade disruptions have also

meant immediate trouble for

export-dependent economies

such as Germany.

The ebbs and flows of the

economy are being watched

closely by Mr. Trump’s political

supporters. One official at the

pro-Trump super-PAC America

First equated the impact of a

potential recession to other

politically seismic events, such

as a domestic terrorist attack

or a declaration of war.

An economic downturn

would provide substantial fod-

der for Democratic presiden-

tial candidates, who were al-

ready attacking Mr. Trump’s

handling of the economy be-

fore this week’s warning signs.

“The country’s economic

foundation is fragile,” Sen.

Elizabeth Warren wrote in a

blog post last month titled

“The Coming Economic

Crash—And How to Stop It.”

“The Trump administration’s

reckless behavior is increasing

the odds of just such a shock.”

California Sen. Kamala Har-

ris in a bus tour across Iowa

criticized Mr. Trump for

“crowing” about a strong

economy, while many Ameri-

cans, she said, are struggling

to pay rent and have to rely on

payday lenders. “Today’s econ-

omy is not working for work-

ing people in America, and it

needs to be addressed,” Ms.

Harris said at a rally in West

Des Moines on Saturday.

Mr. Trump has sought to

place the blame for any eco-

nomic downturn on the Fed,

spending much of Wednesday

attacking the central bank and

Mr. Powell, and saying that

the trade tension with China is

“not the problem.”

Mr. Trump and his aides are

also falling back on a familiar

rejoinder: blaming the media.

Mr. Trump in a tweet Thurs-

day accused the media of “do-

ing everything they can to

crash the economy because

they think that will be bad for

me and my re-election.”

One White House official

said it is too early to determine

whether the economic news

poses a serious risk to Mr.

Trump’s re-election chances.

White House and campaign

aides acknowledged privately

that a recession would threaten

Mr. Trump’s re-election bid,

which some advisers—and the

president himself—believe will

be a tough fight, even with a

good economy.

“A full-blown recession

would certainly cause the

Trump re-election campaign to

have to hit the reset button. A

strong economy is at the cen-

ter of President Trump’s argu-

ment for a second term,” said

Dan Eberhart, a Republican

donor and energy company ex-

ecutive. But he added, “The

media follows the day-to-day

changes in the market much

closer than the voters do. This

week’s data is a caution flag,

but we’ve got plenty of laps

left to go in this race.”

—Michael C. Bender

and Tarini Parti

contributed to this article.

BYANDREWRESTUCCIA
ANDREBECCABALLHAUS

Economic Risks Weigh on Trump 2020 Bid

A downturn would

provide Democratic

candidates with

fodder next year.

Retail sales rose in July, the Labor Department said, though the economy remained troubled by softness in manufacturing output.

RICHARD B. LEVINE/ZUMA PRESS