Well, Goldman is out with the latest edition of their quarterly corporate “Beige Book,” in which David Kostin and his disciples comb through earnings transcripts in search of clues as to what management teams think is important.
The idea is to discern common themes and then extract management’s take on those themes on a company-by-company basis.
Unsurprisingly, companies are concerned with growth, regulation, and labor inflation.
You’ll recall we took a look at wage pressure and how it affects corporate bottom lines earlier this week when we highlighted a separate note from Goldman in “What Does An Overheating Labor Market Mean For Stocks? I’m Glad You Asked.”
Here are the bullet points from Goldman’s executive summary:
- Economic growth: The recognition of improving sentiment and growth expectations was ubiquitous in 1Q earnings calls, but not all managers have seen it manifesting in higher demand.
- Regulation: Managers hoped for widespread deregulation and improved regulatory clarity, but uncertainty remains high.
- Labor inflation: The US economy is at full employment and wage growth is accelerating.
And here are some excerpts from the accompanying color.
Management teams were mixed in their assessment of whether a much-discussed rekindling of animal spirits since the election has led to a tangible increase in demand. Most management teams recognized an improvement in sentiment and growth expectations, but many said they have not yet seen evidence that improving sentiment is translating into increased business activity. Other companies – notably those in the Financials sector – did see confirmation that the improvement in sentiment is flowing through to their bottom lines.
- American Express Company (AXP): The first thing I’d say is that through March 31, as we look at our results, it’s hard for us to see anything that’s suggestive of a material uptick in consumer confidence or consumer or commercial spending.
- Chubb Limited (CB): I know many were cautious about the stance we’re going to take regarding trade because that can have, depending on the stance we take and the approach we take as a country, that can have a negative impact on economic growth… The moment of euphoria is passing and I think we’re at a moment where there is a sense of realism. And so, therefore, I’m not really seeing a pickup in economic activity that – a trend change that is impacting our business.
- AT&T Inc. (T): U.S. business investment as a percent of GDP continues to be low. Growth expectations in the economy have been rising, but we’ve yet to see that translate into economic gains or demand.
- Honeywell International Inc. (HON): The short cycle is a slightly different story and we’re positive on the short cycle too. But if you think about the animal spirits that we saw overall in the markets, particularly in the U.S. in let’s say January versus what we see now, I would say that’s a slight down arrow versus what it was, and I think some of that could be reflected in the short cycle.
Part of the improvement in sentiment and growth expectations is due to optimism that deregulation of the US business environment and an improvement in regulatory clarity will improve the operating environment for US companies. Commentary from earnings transcripts corroborated wide ranging optimism among management teams. But just as views on an improvement in economic growth varied from company to company, so too did management opinions on the headway made so far with deregulation. Some managers noted that they see discernible progress on regulatory reform in their industry while others said they will have to continue to wait and see.
Less Progress / General:
- Visa Inc. (V): We would have expected sometime over the last couple weeks to have gotten clarity. There was supposed to be clarity no later than the end of March on the next chapter of regulation or guidance in terms of how things would have to go forward. And there hasn’t been, and we’ve been told that it will be delayed likely into early May.
- Bank of NewYork Mellon Corporation (BK): If you think about the U.S. regime, there’s been an awful lot of new rulemaking that’s gone on and actually the implementation cost to comply with that. And I probably said to you once or twice before that we think that the run rate has probably peaked and I was wrong… And there will certainly be, I’m sure, no matter what the change in the regime is, ongoing requirements to improve that. But we’d like to think that we don’t see a lot of new rulemaking out there because I think we’re getting all the way through the Dodd-Frank requirements. So, in the U.S., there probably would be some relief regardless of what the regime actually does.
Despite renewed growth optimism, a US labor market at full employment and upward pressure on wages reminds investors that we are in the eighth year of the current expansion. The tight labor market should continue to support higher wages, posing a risk to corporate profit margins. A growing chorus of managers acknowledged this issue in 1Q earnings calls and noted an acceleration in compensation costs from the year prior.
- Union Pacific Corporation (UNP): Compensation and benefits expense increased 4% versus 2016. The increase was primarily driven by a combination of higher wage and benefit inflation, higher volume, and weather-related costs. Labor inflation was about 5% in the quarter. Partially offsetting higher volumes were solid productivity gains and a smaller capital work force resulting in total work force levels declining 4% in the quarter versus last year or about 1,600 employees less. For the remainder of 2017, we do expect force levels to adjust with volume but will also reflect ongoing productivity initiatives.
- AutoZone, Inc. (AZO): We are beginning to see an acceleration in average wage rates as certain states and municipalities have increased minimum wages and as some national retailers have also increased entry-level wages.
- Darden Restaurants (DRI): Restaurant labor was favorable driven by lower manager incentive pay, given last year’s strong performance in the third quarter. This was partially offset by continued hourly wage rate inflation pressure.…overall inflation of approximately 1.5%, driven by wage inflation for the year of approximately 3.5% to 4%….We also took some – a little bit of pricing on the West Coast in February to offset the minimum wage increases