Larger companies in United States forecast possible increase in costs
Some U.S. companies are starting to notice the potential toll of tariffs on their costs and earnings, as are some consumers.
Caterpillar said in its second-quarter earnings report that a 25 percent U.S. tariff on imported steel could cost the company $100 million to $200 million in the second half of the year.
Caterpillar, based in Peoria, Illinois, however, still raised its earnings per share outlook for 2018 to $11 to $12, up from $10.25 to $11.25.
"Based on outstanding results in the first half of the year and continued strength in many of our end markets, Caterpillar is again raising its profit outlook for 2018," CEO Jim Umpleby said in a statement.
According to Reuters, larger U.S. companies are starting to take a tariff hit, forecasting a possible impact on earnings and an increase in costs.
U.S. automakers General Motors and Ford Motor lowered their full-year earnings forecasts due to tariffs.
General Electric estimated that new tariffs on its imports from China could raise its costs by $300 million to $400 million overall.
Tyson Foods Inc, the largest U.S.-based meat producer, cut its full-year earnings forecast, citing uncertainty in trade policies and increased tariffs that have hurt domestic and export prices of meat.
A 10 percent tariff on all imports from China would lower Goldman Sachs' 2019 S&P 500 earnings per share estimate by 3 percent, chief U.S. equity strategist David Kostin wrote.
If "tensions spread" and a 10 percent tariff were imposed on all U.S. exports to China, Kostin said the S&P 2019 EPS estimate would be 15 percent lower.
"Tariffs benefit some domestic industries but pose a risk to S&P 500 earnings through reduced revenues (lower exports) and weaker margins (higher input costs)," Kostin wrote.
"When the companies' costs are going up, the first thing they do is try to make savings internally by cutting travel and leaving positions vacant," said Marshall Meyer, a professor at the Wharton School at the University of Pennsylvania.
Brinly-Hardy, a U.S. lawn-care equipment maker based in Indiana, said it has to lay off 75 employees this summer, saying that tariffs on Chinese imports could be the "nail in our coffin".
"But eventually they have to raise prices for consumers," Meyer added.
U.S. consumers have started to see higher prices for recreational vehicles, soda, beer and other goods.
"I cannot enumerate all the industries where tariffs will impact prices," Meyer added. "For example, all products with significant steel and aluminum content are vulnerable."
U.S. domestic steel and aluminum prices are up 33 percent and 11 percent, respectively, since the beginning of the year.
Coca-Cola announced last Wednesday that it would raise prices on carbonated drinks. CEO James Quincey said that the action was necessary to respond to higher production costs for cans due to the aluminum tariff.
"Clearly, it's disruptive for us. It's disruptive for our customers," Quincey said on the company's earnings call last week. "But I think the conversations have been about how this is going to work for each and every customer."
According to the U.S. Labor Department, consumer prices rose 2.9 percent in June from a year ago－the highest increase in more than six years.
The producer price index rose 3.4 percent in June from a year earlier, as energy and shipping costs climbed along with metal prices.
"The current administration has been deliberately avoiding consumer goods and focused on items used by businesses," said Philip Levy, senior fellow on the global economy at The Chicago Council on Global Affairs. "But it still will affect some consumers, because when you raise the prices of the input of the U.S. domestic production process, which is what they ended up doing, that is where you will have a consumer impact."
