US companies face ‘growing risk’ to profit margins: Fitch

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Diving brief:

  • A weakening global economy and the possibility of a U.S. recession pose “a key and growing risk” to U.S. corporate revenues, profit margins and cash flow outside of the financial sector, according to Fitch Ratings.
  • Wage inflation, continued disruption to supply chains, potential difficulty in passing cost increases to consumers, and high commodity and commodity prices are particularly challenging airlines, homebuilders and contractors. building products companies, Fitch said.
  • “We expect demand erosion to become a moderate but manageable credit risk for 11 of the 15 highlighted sectors in 2023 and 2024, largely due to rising interest rates,” he said. said Fitch. “Rising raw material/commodity costs will remain the most common moderate to large credit profile risk (12/15 sectors) across all sectors in 2023-2024.”

Overview of the dive:

CFOs trying to gauge demand for their company’s goods and services over the next few quarters face a wide range of signals about the health of the economy.

They can find encouraging signs in the July data. Price pressures eased slightly and employers far exceeded hiring forecasts, pushing unemployment down to 3.5%. Gas prices fell 11% over the past month, easing the burden on consumers.

Also, by at least one measure, earnings during the second quarter were robust, suggesting that companies were able to pass on rising labor and material costs to consumers. Profits for domestic non-financial corporations rose $173.9 billion during the period, compared with a $4.8 billion decline in the first three months of the year, the The Commerce Department announced Thursday.

Yet, corporate America faces underlying threats to sustainable profit margins. Russia’s invasion of Ukraine has pushed up energy and commodity prices, fueling the highest inflation in four decades and adding urgency to the Federal Reserve’s efforts to slow gains prices by raising the benchmark interest rate from a record high.

Fed tightening increased recession risks and inhibited risk-taking, triggering volatility in financial markets, rattling the housing market and ending an M&A boom.

The United States may already be experiencing a downturn. The the economy shrank 0.6% in the second quarter after falling 1.6% in the first three months of 2022, meeting the common definition of a recession as at least two consecutive quarters of negative growth.

Gross domestic product is likely to grow 2.9% this year, 1.5% next year and 1.3% in 2024, Fitch said in another report, forecast this growth “will barely slow positive from mid-2023 onwards due to aggressive monetary tightening”.

“Falling demand, due to weaker global economic growth and a possible recession in the United States, is a key and growing risk to revenues, margins and cash flow for U.S. non-financial businesses” , said Fitch.

The credit outlook for most sectors is solid, Fitch said. “Demand erosion is expected to have minimal impact on most industry credit profiles in 2022 given consumer strength, but could be riskier in 2023/24, particularly for homebuilders, as interest rates rise.”

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