August 1, 2019 / 11:34 PM / 17 days ago

Free-spending consumers lift company profits, but Trump tariffs now loom

CHICAGO (Reuters) - U.S. President Donald Trump’s plan to slap new tariffs on Chinese imports comes on the heels of unexpectedly strong second-quarter results for automakers, consumer products companies and restaurant chains, boosted by spending on high-end products

FILE PHOTO: A man looks at a Chevrolet Silverado pickup truck during the 2019 New York International Auto Show in New York City, U.S, April 17, 2019. REUTERS/Brendan McDermid/File Photo

Several major U.S. companies, from General Motors to KFC-owner Yum! Brands, defied analysts’ sluggish earnings forecasts.

Refinitiv analysts said on Thursday that they expect quarterly earnings growth of 2.5% for S&P 500 companies, compared with the 0.4% decline they had predicted in mid-July. At the time negative second-quarter outlooks outnumbered positive ones by 3.8 to 1, while the average ratio for the prior four quarters was 1.9 to 1, according to Refinitiv data.

But the rosy outlook may be short-lived. After Trump said on Thursday he would impose an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1, four large retail trade groups warned that the action would hurt consumer purchases, raise prices further and limit hiring.

Even so, consumers would be unlikely to see higher prices when they start shopping for the holiday season, which begins in November, as a result of the new tariffs. Most retailers have already purchased their holiday-season merchandise, and the inventory for the most part has already arrived at U.S. ports and warehouses.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged at a 4.3% rate in the second quarter, the fastest since the fourth quarter of 2017. That followed a rather lackluster 1.1% growth rate in the first quarter, blamed on a 35-day partial shutdown of the government.

Quarterly results from companies catering to consumers showed shoppers flocking to high-end SUVs and ordering more fried chicken on mobile phones. Even products like face creams, potato chips and laundry detergent, which have become more expensive due to surging commodities costs, sold well.

Shares in Kellogg surged 12% on Thursday after the company’s quarterly results beat estimates on strong demand in North America for its increasingly pricy Pringles, frozen Eggo waffles and meatless Morningstar burgers. Kellogg CEO Steve Cahillane told Reuters that sales growth in North America was due to investments in marketing and new products such as Eggo French Toast.

Similarly, Procter & Gamble’s stock touched a record high on Tuesday after the company reported strong demand for skincare and detergent products in the second quarter even though it increased prices to offset surging raw material costs. P&G, whose brands include Olay and Tide, said the price hikes contributed 3 percentage points to a 7% jump in organic sales and said North America sales rose by the high-single digits.

The consumer goods industry has rushed to revamp products and roll out premium ones to justify higher prices and compete with cheaper, increasingly popular store-brand products from Walmart, Costco and Kroger.

Nestle, the world’s No. 1 consumer goods company whose brands include Nescafe coffee pods and Lean Cuisine, also raised prices during the quarter. In July, confectionary company Hershey said it would hike wholesale prices by 10% on its single-serve products, which account for about a third of total sales. The Reese’s Pieces maker, which had already raised prices on other products this year, beat quarterly earnings forecasts when it reported last week, even though price hikes ate into volumes.

Consumers are also splurging on cars, even as prices have risen to near an all-time high, at $37,169 per vehicle according to Kelley Blue Book. General Motors shares hit a more than one-year high on Thursday as its redesigned Chevrolet Silverado and GMC Sierra pickup trucks helped boost second-quarter profits by $1 billion.

The Retail Industry Leaders Association (RILA), which counts Walmart, Target  and Home Depot  among its members, said the tariffs will raise prices for everyday items like clothing, toys, home goods and electronics.

“This new 10% tariff is a direct hit on consumer products and family budgets,” Hun Quach, RILA’s vice president of international trade, said in a statement.

Reporting by Richa Naidu in Chicago; Additional reporting by Ben Klayman in Detroit, Caroline Valetkevitch in New York and Siddharth Cavale; Editing by Leslie Adler

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