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Continued: Consumers get optimistic, but CEOs hold back

  • Article by: ADAM BELZ , Star Tribune
  • Last update: November 16, 2012 - 10:45 PM

American consumers are gaining confidence on a steady stream of brightening economic news, but American corporations don't seem to be following along.

The housing market has strengthened and household spending in the United States grew faster than expected in September, signaling that consumers grew bolder in the lull between back-to-school spending and the crucial holiday shopping season. Consumer confidence is up.

Yet bellwether American companies like Maplewood-based 3M Co. and Peoria, Ill.-based Caterpillar have cut profit forecasts. The stock market is falling for the fifth straight week. On Thursday, the Dow Jones industrial average hit its lowest point in nearly five months.

The reason for the gap in perceptions is the struggling global economy, which is front of mind for many executives but less visible to the average consumer. The fact is that America's largest companies are less dependent on the U.S. market every year.

This is not a new phenomenon, but the recession and uneven recovery have laid it bare. U.S. corporations raked in profits while the American economy slid into recession, partly on the strength of global sales. Now, when the U.S. economy seems to be reviving, a stagnant Europe and weakened China have slowed profit growth.

"They have pretty much stopped being American companies and are global companies now," said Richard Longworth, a fellow at the Chicago Council on Global Affairs. "They probably don't count on the American market. They're glad to have the sales that they have here, but that's really not where their focus is."

Companies and consumers also have different outlooks because they pay attention to different things.

For example, business leaders have for months been focused on the potential economic consequences of the fiscal cliff -- a series of automatic tax increases and spending cuts that could trigger another recession if not addressed by Congress and the White House before the end of the year.

Election exit polls showed voters had barely noticed the fiscal cliff. Consumers pay more attention to fluctuations in gas prices and the value of their homes.

The average price of a gallon of gas has fallen nearly 40 cents in the past two months, according to GasBuddy.com, and home prices have been rising across the country. In the Twin Cities, both the number of sales and the average sale price rose 15 percent in October, according to the Minneapolis Area Association of Realtors.

A report Thursday showed Minnesota lost 8,100 jobs in October, but the state is still up 34,700 for the year. National consumer sentiment in October reached its highest level in five years, according to the Thomson Reuters/University of Michigan survey of consumers.

"The very positive economic expectations of consumers stand in sharp contrast to growing concerns expressed by investors and companies about the impending fiscal cliff, as well as the impact of a slowing global economy," said Richard Curtin, a University of Michigan economist.

Global interactions

Announcements on Chinese infrastructure spending can swing Caterpillar's stock price. The ongoing European financial crisis has cut into revenue for Minnesota-based firms including 3M and Medtronic.

3M, the maker of everything from Post-It Notes to displays for flat screen televisions, does 66 percent of its sales overseas. Forty-five percent of Medtronic's sales are international. Thirty-two percent of Toro Co.'s sales are overseas. Publicly traded Twin Cities firms like Graco Inc., H.B. Fuller and Donaldson Co. do more sales outside of North America than within it.

Citing the global economy, Caterpillar and 3M slashed their 2012 profit forecasts in consecutive days in late October. Investors got skittish. On Thursday, the Dow Jones industrial average fell to 12,542, its lowest level since June 26. Over the past month, the Star Tribune 100 -- an index of the largest publicly traded companies in Minnesota -- has fallen 3 percent.

The consistent story for Minnesota firms is declining or flat international sales.

3M's sales in Western Europe were down 1 percent in the past quarter and sales in China were flat, Inge Thulin, the company's CEO, told analysts.

"We still face the challenge of sluggish economies in large developed regions like Western Europe and Japan," Thulin said. "In China, the year clearly has not played out the way most anticipated."

Medtronic's European and Canadian sales were down 6 percent. Toro's international sales fell 9.2 percent. Pentair's sales fell 2.8 percent, mostly because of declines in Western Europe, the company said. Graco's sales, which grew internationally in its most recent quarter, would have fallen 10 percent in Asia if the company hadn't acquired a company with operations there in April.

Smoothing effect

The United States is still the world's largest market, but 75 percent of the world's purchasing power is elsewhere, said Ed Dieter, acting director of the Minnesota Trade Office.

"Exporting can really help you to smooth your business cycles, because it's actually unusual for the whole world to go into recession at one time," Dieter said. "When the U.S. slows down, there's a pretty good chance that other markets will lift you up."

The opposite is also true, and this is good for Minnesotans, since the state's anchor employers can absorb weakness in one part of the world as long as another part of the world's economy is healthy.

"In some ways it's good, because it means that we have our eggs in different baskets," said Ian Maitland, a business professor at the University of Minnesota's Carlson School of Management. "That helps to stabilize our economy and protect us from some of the swings."

Adam Belz • 612-673-4405

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