Apple’s beat Wall St. consensus figures by posting earnings per share of $1.35 compared to Wall St. expectations of $1.17. The company also produced revenue of $8.33 billion, up 12% from last year. The recession must be over.
Apple’s figures are a conundrum. The firm sold 5.2 million iPhones in the quarter ending in June. A lot of people are using unemployment benefits to buy the handsets, or people who are supposed to be saving money and not spending it, according to the government, are running up the balances on their credit cards as if the economic downturn never happened.
Caterpillar (CAT), which sells products at the far end of the spectrum from Apple’s, had a better quarter than expected and raised guidance for the sales of its big machines. Revenue was down 41% to $8 billion. Wall St. looked at that as a recovery, oddly enough. The firm’s stock was up 10% during the course of the trading day after the release of its results. The global economy is still supposed to be in tatters so it is hard to imagine which companies in which countries are buying big machines.
The optimism from other sectors of the economy was nearly as great as it was in handsets and heavy machinery. Phama giant Merck (MRK) said it was doing better than most analysts expected. Starbucks (SBUX) did particularly well and its stock rose by nearly 10%.
Four sectors of the economy and businesses worlds with four sets of results which were better than could have been hoped.
A great number of analysts’ views of the current state of consumer spending and capital investment must be wrong. People without access to money and facing rising prospects of job losses are buying expensive coffee and consumer electronics. Machines and engines that sell for tens and sometimes hundreds of thousands of dollars still have a market.
Ben Bernanke, the Fed chair, was testifying before Congress while a lot of the earnings activity was going on outside Washington. He gave the impression that he was guardedly encouraged about the recovery of economic growth. He made it clear that the Fed would keep interest rates low. He must know something that Apple and Starbucks customers do not. Many parts of the economy are still on respirators and he means to make certain that they survive.
Bernanke’s comments only make the puzzle more complex. Earnings for many large companies, companies which are reasonable canaries in the coal mine of broad business prospects are doing better than expected. There are very few reasons that could be true.
Businesses and consumers have a renewed appetite for risk. It is not the kind of risk that banks took playing roulette with derivatives. It is old-fashioned risk that requires a modest view of the near-term future, a future in which people can count on employment and businesses can count on rising sales. Apple and Starbucks are not bad proxies for much of this. Five million iPhones and many millions of cups of coffee represent the activity of a small army of consumers
The overall economy may be breaking into two pieces. One is the 85% of people who are still working and the large majority of businesses, large and small, which are still making money, although probably less than they were two years ago. These consumers and companies believe that their prospects are reasonable enough so that they are willing to go part way back into the water of spending. It may only be a tentative step, but a few months ago, there was no stepping at all.
The smaller and more desperate portion of the economy has not changed much since early in the year, and some portions of it may have gotten worse. Banks, both national, and regional, had reasonable quarters in the period ending in June primarily because of one-time gains. They still face ugly write-offs on commercial real estate and consumer credit. Many of these firms may still be undercapitalized. It is not out of the question that the weakest ones including Citigroup (C) may still have to raise more money. The still-bleak part of the financial world also includes the 15% and rising number of people who are unemployed or under-employed who face an end to their jobless benefits and despair over finding new work.
Part of the riddle of why businesses like Starbucks and Caterpillar are doing well is not a riddle at all. Starbucks fired 12,000 people last year and said it is planning more expense reductions. Caterpillar’s payroll was down 15,000 people in the second quarter from where it was in the same period a year ago, when the effects of its Japanese business are excluded.
Many companies are posting better earnings because they have fewer people to pay. Consumers who have not been fired are beginning to feel that they are less likely to be fired. Unemployment as the government describes it went from 6% to nearly 10% quickly. It may rise another 1%, but the great series of record lay-offs is almost certainly over. Those who survived it are much more likely to be working next year.
It is an odd recovery, and still ugly, but enough of a recovery so that spending is no longer so frightening. The world may be going badly, but it is no longer coming to an end.
Douglas A. McIntyre
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