Why Corporate America Is Bullish on the Economy

Corporate executives are surprisingly bullish about the U.S. economic outlook for 2020, judging from an extensive analysis of management commentary in Q3 2019 earnings conference calls, as conducted by Goldman Sachs. Among the companies making particularly optimistic comments are Marriott International Inc. (MAR), Procter & Gamble Co. (PG), Republic Services Inc. (RSG), Harley-Davidson Inc. (HOG), and Allegion PLC (ALLE).

"Despite high levels of uncertainty, executives remained upbeat on the 2020 economic outlook. Corporate managers were optimistic about recent economic data, particularly consumer data," Goldman writes in the current edition of their quarterly S&P Beige Book publication, released on Friday. "However, uncertainty remains high and executives expect to be dealing with US-China trade tensions for the foreseeable future. Consequently, inventories have declined and dealer demand has dropped," they add.

Significance For Investors

Hotel operator Marriott calls the U.S. economy "robust" overall, and notes that its industry has low unemployment and high occupancy. Consumer products company Procter & Gamble sees "no signs of weakness." Waste hauling company Republic says "the underlying economy is pretty strong...our view now and our view for 2020 is the economy is in pretty good shape." Motorcycle manufacturer Harley-Davidson does not see any more uncertainty than 6 months ago, and noted that its own industry enjoyed a Q3 "pick up," calling this "an encouraging sign."

Security products and services company Allegion says "we are solid, positive, upbeat on the economy." They find that the key indicators for their business are encouraging, including consumer confidence, low unemployment, high tax revenues for state and local governments, low interest rates, and a tight housing market. In conclusion, they "don't know how you could not be positive about the view going forward."

However, the bullish views observed by Goldman in Q3 conference calls conflict with recent surveys that show declining confidence among senior executives. CEOs are more gloomy about the future than at any previous time since the global financial crisis of 2008, according to a survey conducted by the Conference Board that was cited in a previous Goldman report. Meanwhile, "More than half (53%) of US CFOs believe that the US will be in recession by the 3rd quarter of 2020 and 67% believe that a recession will have begun by the end of 2020," per the latest Duke University CFO Global Business Outlook survey.

Other key trends discussed in Goldman's Beige Book relate to spending plans and the upcoming 2020 U.S. national elections. "S&P 500 cash spending plummeted in 2Q driven by a ten-year low in CEO confidence, but has stabilized in 3Q. Many executives highlighted deferring capital expenditures as they approached investments with increased caution," the report noted. "Firms also outlined plans to divert cash from capital projects and [stock] buybacks in favor of strengthening the balance sheet," the authors added.

Regarding the 2020 elections, many companies indicated that they are planning for multiple outcomes. Others preferred to discuss their long-term plans, while avoiding comments on politics. Some noted that there often is a big difference between what politicians advocate as candidates, and what they they actually do once elected.

Looking Ahead

In contrast to the bullish notes on the economy that Goldman finds in earnings commentary, Q3 2019 profits for the S&P 500 are on track to be down on a year-over-year (YOY) basis for the third consecutive quarter. However, while aggregate S&P 500 Q3 earnings are down by about 1% YOY so far, the median S&P 500 stock actually has a 5% increase, per Goldman's current US Weekly Kickstart report.

Real GDP growth in the U.S. will slow from average rates of 2.9% in 2018 and 2.3% in 2019 to its long-term trend of 2.0% in 2020, per The Conference Board. However, this will represent a slight increase from annualized rates of 1.9% in Q3 and Q4 2019. The OECD calls for 2.28% U.S. real GDP growth in 2020, while the IMF projects U.S. economic growth to be 2.1% in 2020, down from their estimate of 2.4% for 2019.