The nimbleness of corporate America is on full display this earnings season, with a little assist from fiscal policy.
US manufacturers for the most part have tweaked their doom-and-gloom scenarios from late April, when they had just been shell-shocked by the Liberation Day tariffs announced by President Donald Trump. Outlooks in their second-quarter earnings conference calls have been along the lines of: “It’s not quite as bad as we thought.”
Industrial companies are absorbing some of the tariff blow and have pulled many levers to cope, including front-loading inventories, seeking alternative suppliers, reducing the variety of goods for sale and raising prices. The haze is clearing a bit after Trump made truces, delayed deadlines and rammed through some deal frameworks.
The full tariff damage to the economy hasn’t flowed through yet. Cautious comments from trucking companies and airlines point to slowing demand, but a recession seems off the table at the moment. Inflation has been tame for now even though some companies have already pulled the trigger on price increases. More will come toward the end of this year, especially as companies work through front-loaded inventory, but how much is the raging discussion among Federal Reserve policymakers.
The economy — and manufacturing in particular — has some tailwinds from the huge investment in data centers, a commercial aerospace rebound and a defense industry boom. Some manufacturers, including Boeing Co. and GE Aerospace, are thriving in this trade war. The carmakers — especially the more internationally focused General Motors Co. — have announced the largest tariff bills, but they’re also poised to gain US market share as competitors’ imported vehicles pay even higher levies.
Those economists and analysts who predicted recession and accelerated inflation perhaps didn’t plug into their models the mitigation efforts and the extra boost from the recently passed tax law. Whatever else it might do, the latter has provided a sizeable cash influx — in some cases more than the tariff hit — from a provision that allows companies to depreciate fully their capital investments.
The lack of a crisis has helped drive a 28% gain in the S&P 500 Index since its April 8 low this year.
Companies like Stanley Black & Decker Inc., the toolmaker, and Hasbro Inc., which produces toys and games, are squeezed especially hard because they make goods abroad — particularly in China — and sell them in the US. These companies certainly have been hurt, but it’s more bumps and bruises than broken bones.
Hasbro, which gets half of its US toy and game volume from China, had discussed in April a tariff impact of up to $180 million this year. In July, the company revised those costs to about $60 million. The toymaker still forecasts a revenue increase of about 5% this year and adjusted operating margins of 23%, a gain of 3 percentage points from last year.
“We are compensating for these costs through a combination of cost reductions, rebalancing our marketing spend, diversifying our supplier mix, and implementing some targeted pricing actions,” Chief Executive Officer Chris Cocks said in its earnings conference call.
Stanley Black & Decker now says tariffs will be a $800 million drag before mitigation efforts, less than half of the $1.7 billion estimated in April, when Trump’s tariffs on China soared to 145%. The company, which gets 15% of products sold in the US from China, pushed through a “high-single-digit” average US price increase in April and plans to make a smaller one later this year. The toolmaker wants to produce more in the US and is working to make more of its Mexico-sourced goods compliant under the USMCA trade pact, which for now is exempt from tariffs.
Both are seeking to cut their exposure to Chinese manufacturers. Stanley Black & Decker aims to cut its China-sourced merchandise sold in the US by a third to 5% by the end of next year. That percentage was much higher several years ago, the company said. Hasbro will have a tougher time weaning itself from China, though it expects to drop the volume to 40% by 2027.
In April, Brunswick Corp., which makes boats and Mercury outboard motors, had put the cost of tariffs in a range of $100 million to $125 million for this year. That range was adjusted down to $55 million to $70 million in July. Brunswick produces its boat motors in the US, giving it a leg up on Japanese competitors that face tariffs on US imports, the company said.
Many companies said it was too early to calculate the windfall from so-called bonus depreciation because the complex tax bill was signed into law in early July. For those companies that took a stab at it, the benefits are substantial.
Lockheed Martin Corp., which makes fighter jets and missile systems, said the accelerated depreciation on research and development spending will be as much as $600 million. That’s larger than the estimated $500 million cost of tariffs (combined with a writedown from a classified aerospace program that the company didn’t break out separately).
Paccar Inc., which makes large trucks, said the tax windfall could reach $400 million. Union Pacific Corp. said the annual benefit would be as much as $300 million, and Roper Technologies Inc., an industrial software provider, expects its tax bill to be cut by $150 million.
“It’s good news for us, good news for our customers,” Brice Poplawski, Paccar’s chief financial officer, said in a conference call.
The economic models that predicted recession and a surge in inflation need to be revisited. It turns out they underestimated corporate America’s ability to adapt — with a helping hand from the government.
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