Boeing Sales Beat ‘New Normal’ Pessimism as Fed Prepares to Act

October 22, 2010, 12:50 AM EDT

Rising sales at companies from Boeing to Intel show they are growing even before a boost from the next round of Fed easing

By Ian Katz

Oct. 22 (Bloomberg) -- Rising sales at companies from Boeing Co. to chipmaker Intel Corp. and railroad CSX Corp. show U.S. businesses are growing even before a boost investors predict from the next round of Federal Reserve monetary easing.

About 85 percent of companies in the Standard & Poor’s 500 Index have exceeded analysts’ per-share profit estimates so far in third-quarter reports. The S&P 500 gained 11 percent since Aug. 27, when Fed Chairman Ben S. Bernanke said the central bank “will do all that it can” to keep the economy’s rebound alive. General Electric Co., Delta Air Lines Inc. and retailers including Kohl’s Corp. are planning to add workers.

The earnings and market enthusiasm run counter to pessimism about the U.S. economy ahead of Nov. 2 congressional elections in which Republicans are projected to gain seats from President Barack Obama’s Democrats. The jobless rate was 9.6 percent in September, exceeding the 5 percent rate as an 18-month recession started in 2007. Foreclosures reached a record in September.

“The market is telling us it’s not all doom and gloom,” said Nariman Behravesh, chief economist at IHS Inc., a consulting firm in Lexington, Massachusetts. “Earnings are very good in many parts of the economy.”

The profit is driven in part by overseas growth that’s outpacing the U.S. expansion. Caterpillar Inc., the world’s largest maker of construction and mining equipment, and United Parcel Service Inc., the largest package-delivery company, cited international demand as they reported higher profit and raised their forecasts yesterday.

New Normal vs. New Mix

As opposed to a so-called new normal environment of lowered consumer spending suppressing growth, a “new mix” of increased productivity and exports may spur economists to raise growth estimates for next year, said Joe Carson, director of economic research at AllianceBernstein LP in New York.

“The recovery that started out very narrow is beginning to broaden out,” Carson said. For now, economists surveyed by Bloomberg News this month forecast an average 2.7 percent gross domestic product growth this year and 2.4 percent in 2011.

Boeing, the world’s largest aerospace company, raised its full-year earnings forecast Oct. 20 and posted a third-quarter profit on higher jetliner deliveries. There have been 472 orders so far this year, exceeding last year’s total, prompting the company to make plans to boost production.

The orders are coming amid a “slow, steady kind of recovery,” Chief Executive Officer Jim McNerney said on an Oct. 20 conference call. Most of the demand is from overseas.

Room for Earnings Growth

“Companies can still increase earnings beyond expectations in this environment,” said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $350 billion. Corporations are spending to improve efficiency and not on “irrationally expanding capacity into a weak environment.”

Automobile production is aiding the recovery, Michael Ward, CEO of Jacksonville, Florida-based CSX, said on Oct. 13. CSX, the second-largest publicly traded U.S. railroad, reported third-quarter profit that beat analysts’ estimates as a 44 percent increase in auto shipments boosted rail volumes.

Parker Hannifin Corp., the Cleveland-based maker of motion-control products, said sales in its Industrial North America division rose 36 percent in the three months ended in September from a year earlier. The maker of valves and pumps raised its annual forecast after fiscal first-quarter earnings more than tripled.

GE is optimistic even after a 5 percent third-quarter sales drop. Higher airline traffic, rail loadings and cargo freight miles all are positive signs, Chief Financial Officer Keith Sherin said in an Oct. 15 interview. Fairfield, Connecticut- based GE is the world’s biggest maker of power-plant turbines, jet engines, medical imaging equipment and locomotives.

Monetary Policy

The Fed may take no chances and move to add stimulus. About 90 percent of respondents to a Citigroup Inc. survey said they expect another round of large-scale asset purchases by the Fed to bolster the economy, a tactic known as quantitative easing, after the central bank’s Nov. 2-3 meeting.

“Our monetary policy for the first time is not working,” Coca-Cola Co. CEO Muhtar Kent said in an interview Oct. 19. “Government needs to step in and borrow, and provide intellectually stimulating incentives for innovation and entrepreneurial spirit in the country.”

There’s a case to be made for additional stimulus because inflation is too low and unemployment too high, Bernanke said Oct. 15. Inflation rose 1.4 percent for the 12 months ended in August. The Fed’s preferred range is 1.7 percent to 2 percent.

Until the U.S. economy manages a higher level of sustained growth, companies are fortifying their earnings and sales with overseas expansion.

Growth Overseas

Intel, the world’s biggest chipmaker, predicted fourth- quarter sales may exceed some analysts’ estimates, helped by demand in emerging economies. Revenue will range from $11 billion to $11.8 billion, Santa Clara, California-based Intel said in a statement Oct. 12. That compared with analysts’ average projection of $11.3 billion in a Bloomberg survey.

Global economic growth will be “bifurcated” into two groups, with the U.S., Europe and Japan growing less than 3.5 percent and emerging markets expanding 6 percent to 8 percent, Sandy Cutler, CEO of Eaton Corp., said in an interview. The shares of the Cleveland-based maker of circuit breakers and parts for factory equipment rose yesterday to the highest since June 2008.

Caterpillar has announced plans in the past five months to build factories in Brazil and China, where economic growth is stronger than in the U.S. Overseas demand will help sales approach $50 billion next year, from $41 billion to $42 billion in 2010, the Peoria, Illinois-based company said in a statement.

Spending to Expand

Atlanta-based shipper UPS yesterday said average daily domestic volume rose 3.6 percent in the third quarter while international surged 13 percent, led by Asia. The company raised its full-year profit forecast to as much as $3.54 a share, from $3.35 to $3.45 previously. The average estimate was $3.47.

Gap Inc., the San Francisco-based operator of more than 3,000 clothing stores, expects to spend $575 million on capital expenditures this year. That’s an increase of 72 percent from a year ago as it opens stores in China and Italy, expands online sales outside North America and cuts back on U.S. retail space by closing and shrinking locations.

The North American retail market has matured for the company’s three brands -- Gap, Old Navy and Banana Republic -- Chief Executive Officer Glenn Murphy said in a presentation to investors and analysts Oct. 14.

Atlanta-based Delta said Oct. 15 the airline will add 1,000 flight attendants, many of them to work on more profitable international routes for the world’s second-biggest carrier, as global demand for travel improves.

Retail Spending Rises

There are signs the American consumer may be starting to revive. Retail sales rose 0.6 percent in September following a 0.7 percent gain in August that was larger than previously estimated, the Commerce Department reported last week.

Wal-Mart Stores Inc., the world’s largest retailer, may have “positive” fourth-quarter sales at U.S. stores open at least a year after five consecutive quarters of decline, CEO Mike Duke said.

“I feel good about our U.S. plans,” Duke said during an investor conference Oct. 13. Bentonville, Arkansas-based Wal- Mart has yet to release a detailed forecast for the period. Two months ago, Wal-Mart said third-quarter same-store sales in the U.S. would range from a 2 percent drop to a 1 percent gain.

Kohl’s, the fourth-largest U.S. department store chain, plans to hire about 40,000 people this holiday season, 21 percent more than last year, to prepare for a projected uptick in sales. They will work in Kohl’s 1,089 stores, as well as distribution centers and credit operations, the Menomonee Falls, Wisconsin-based company said in a statement.

Midwest Agriculture

Manufacturing and agriculture are boosting the U.S. Midwest. Manufacturing activity in THE region that includes all or parts of seven states rebounded last month, the Federal Reserve Bank of Kansas City said. Producers’ expectations for future activity also improved, the bank said in a statement Sept. 30.

Cargill Inc., the Minnetonka, Minnesota-based grain distributor that’s the largest closely held company in the U.S., said Oct. 12 that first-quarter profit rose 68 percent. Sales climbed 6 percent to $27.8 billion.

While the growth has lowered the prospect of another recession, that doesn’t mean everything is working as it should, Caterpillar Chairman Jim Owens said.

“In the business community, there’s very little concern about a double dip,” Owens said at an Oct. 14 meeting in Chicago of the Business Council, a private group of corporate executives. “We are concerned about slow growth, suboptimum growth for a two-, three-year period with lingering very high levels of unemployment.”

--With assistance from Anthony Feld, Rachel Layne, Will Daley, Matthew Boyle, Matthew Townsend, Anthony Feld and Wendy Soong in New York; Duane Stanford and Mary Jane Credeur in Atlanta; Susanna Ray in Seattle; Shruti Date Singh in Chicago; Ian King in San Francisco, and Andrea Rothman in Paris. Editors: Kevin Miller, Elizabeth Wollman

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