Consumers are spending like there’s no tomorrow. But take a look at corporate earnings

By CNN Newsource

Published October 27, 2023 6:41 AM

Analysis by Krystal Hur, CNN

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Economic data released this week suggests that the US consumer is spending like there’s no tomorrow, but corporate earnings indicate that might not last.

US gross domestic product, which measures all goods and services produced in the economy, expanded at an annualized rate of 4.9% during the third quarter, according to fresh data from the Commerce Department.

The measure, which is adjusted for inflation and seasonal swings, clocked in well above the previous quarter’s 2.1% pace and economists’ expectations of 4.3% for the third quarter.

Still, corporate earnings this week show that not every consumer is spending freely, and some are likely to continue tightening their purse strings as high interest rates, the resumption of student loan payments and draining of pandemic-era savings deplete their budgets.

Here’s what six corporations and their executives had to say about the US consumer and economy.

Spending on travel: Earnings from discount airlines this week indicate that the gangbusters demand for travel over the past two years could be moderating.

Spirit Airlines said that softer demand and discounted fares contributed to its third quarter loss of roughly $157.6 million. The discount airline reported a $36.4 million loss during the same period last year.

“Unfortunately, we have not seen the anticipated return to a normal demand and pricing environment for the peak holiday periods,” Ted Christie, Spirit’s chief executive, said in the company’s earnings release. “Given these continued trends, we are evaluating our growth profile and our competitive position.”

Southwest Airlines warned of inflationary pressures and a return to pre-pandemic norms, following insatiable demand for revenge travel that came after Covid-era restrictions were lifted. The company met earnings expectations but missed on revenue for its most recent quarter.

“In the back half of 2024, we expect a nominal decline in seats relative to the same period in 2023,” said Bob Jordan, chief executive at Southwest, during the company’s earnings call. “For the full year, our network plan will focus on absorbing current capacity, maturing development markets and designing schedules for current travel patterns.”

Spending on goods: Some companies producing goods, which consumers have cast aside in favor of experiences for the last two years after staying cooped up indoors during the pandemic, also warned of tougher times in the months to come.

Mattel saw Barbie sales climb more than 16% during the third quarter year-over-year, after the release of its blockbuster “Barbie” movie this summer, and beat both top- and bottom-line expectations. The film is distributed by CNN’s parent company, Warner Bros. Discovery.

The toy-maker said that it expects a strong holiday season but remains cautious about the uncertain macroeconomic environment.

“We are operating in a challenging macroeconomic environment with higher volatility that may impact consumer demand,” Anthony DiSilvestro, chief financial officer at Mattel, said during the company’s third-quarter earnings call.

Rival Hasbro struck a similar tone, slashing its full-year guidance to forecast a 13% to 15% drop in revenue from the 3% to 6% decline that it previously predicted.

“The impact of the broader toy category declines has had a change in our consumer products and total Hasbro outlook,” said Gina Goetter, chief financial officer at Hasbro, during the company’s earnings call. “We believe that retailers will remain cautious with their inventory positions which will have an impact on typical holiday order patterns.”

But Amazon reported better-than-expected earnings and revenue for its latest quarter reported on Thursday after the close. The e-commerce giant also projected fourth-quarter revenue between $160 billion and $167 billion, which would be up from the $149.2 billion it reported for the same period last year.

“This is a particularly action-packed time of year at Amazon and we’re excited for what’s to come,” said CEO Andy Jassy in a press release.

It’s not just the US that’s seeing an increasingly frugal consumer. UPS, a perceived economic bellwether, trimmed its full-year revenue and profit margin outlooks Thursday, citing uncertainty about the global economy.

The delivery giant also noted softening demand in the US during the third quarter, and lower consumer spending in large European markets including Germany and the UK. Germany has already likely fallen back into recession, and the rest of the euro area economy could follow. China’s real estate crisis continues to hobble growth there.

“Since our last earnings call, the global demand environment has slowed and macroeconomic conditions remain challenging,” said Brian Newman, chief financial officer at UPS, on the company’s earnings call. “While consumer spending has been resilient in 2023, headwinds are mounting for the consumer in the fourth quarter.”

Mortgage rates edge closer to 8%

Mortgage rates continued to climb this week amid a stronger-than-expected economy, reports my colleague Anna Bahney.

The 30-year fixed-rate mortgage averaged 7.79% in the week ending October 26, up from 7.63% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 7.08%.

“For the seventh week in a row, mortgage rates continued to climb toward eight percent, resulting in the longest consecutive rise since the Spring of 2022,” said Sam Khater, Freddie Mac’s chief economist.

Rates have been on a tear in 2023, rising two full percentage points.

“Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory,” he said.

How Country Garden became the face of China’s property crisis

Move over Evergrande. There is a new poster child of China’s protracted real estate crisis — Country Garden, report my colleagues Michelle Toh, Laura He and Diksha Madhok.

The homebuilder, once the country’s largest, has defaulted on an international bond for the first time after failing to make payment within a grace period that expired last week, according to separate reports from Bloomberg News and the Financial Times.

Country Garden has not responded to requests for comment by phone or email. Citigroup, reportedly the bond’s trustee with authority to enforce its terms, declined comment. But late Thursday, a panel of global banks and investors determined that a “failure to pay” event had occurred on October 18.

The developer, which has $190 billion in liabilities, had dodged default on multiple occasions in the past month. But persistent weakness in China’s property market and a difficult refinancing environment had hobbled its ability to raise enough cash to service debt of $15 billion falling due by June 2024. Earlier this month, it warned investors that it could default.

The company is now heading towards a debt restructuring, and possibly a messy financial collapse that would send new shockwaves through China’s sputtering economy.