Consumer Boom and Producer Woes Show U.S. Economic Growth Divide

(Bloomberg) -- Friday’s U.S. growth figures and earnings reports this month both illustrated a sharp divide between booming consumer spending and leaner times for producers.

The economy grew at a 2.1% pace in the second quarter, close to the average during the 10-year expansion that became the country’s longest on record this month. But robust consumption was undercut by the first drop in business investment in three years and falling exports, partly reflecting trade tensions and weak global growth.

That poses questions for the economy: How fast can it keep growing, and how long will consumers come to the rescue? So far, it looks like Americans’ wallets are in good shape as sentiment remains strong, though warning signs are emerging.

Read more: Future of U.S. Growth Stands on Consumers’ Shoulders

“We typically see when people are concerned about the outlook, individual consumers they tighten up on big-ticket purchases, and so that’s reflected,” Dow Inc. Chief Executive Officer Jim Fitterling said on a call Thursday. He cited strength on the consumer non-durable side, such as health and beauty care, packaging, and daily activities like retail and restaurants.

Here are some insights that illustrate the case for whether growth will hold up -- or falter:

Optimistic Case

Restaurants: Starbucks Corp., McDonald’s Corp. and Chipotle Mexican Grill Inc. reported surprisingly strong sales growth last quarter, proving that diners were still in the market for cold beverages, breakfast sandwiches and burritos.

“As we think about the consumer and look at the macro environment, the economy continues to be strong,” Gene Lee, chief executive officer of Olive Garden owner Darden Restaurants Inc., said on a June call.

Snacks and drinks: PepsiCo Inc.’s Cheetos and Ruffles helped drive snack revenue in North America up 5% last quarter. Sales were particularly strong in convenience stores, showing shoppers are feeling flush enough to give into cravings on the go.

At Coca-Cola Co., high-end brands like Smartwater Antioxidant are the hot growth area. Sugary soda may be passé, but American consumers are still willing to pay for fancy water.

Airlines: The grounding of Boeing Co.’s 737 Max isn’t helping airline profits, but underlying demand for leisure travel remains strong. “We’re not seeing any real changes in demand, and demand continues actually to be quite robust,” Andrew Harrison, chief commercial officer at Alaska Air Group Inc., said on a call.

The trend is continuing into the third quarter, according to Southwest Airlines Co., which saw business and leisure passengers pick up each month from April to June and citing strong bookings for its new Hawaii routes.

Pessimistic Case

Autos: The sector is on the precipice of a big cyclical downturn for the first time in years, and manufacturers are frantically reducing capacity and cutting tens of thousands of jobs, from Ford Motor Co. to Nissan Motor Co. Parts suppliers BorgWarner Inc. and Continental AG cut outlooks for the market, with BorgWarner calling passenger vehicle production “volatile.”

Automakers have posted year after year of record sales by taking advantage of the appetite for smaller SUVs and luring customers with rebates. But that era is over, and consumers appear willing to let new vehicles age for a while rather than take on a big-ticket item.

Chemicals: The auto industry’s malaise is also hitting makers of coatings and catalysts, like BASF SE, and polyurethane for car seats, like Dow. A slowdown in agriculture, because of tariffs and wet weather, hurt Eastman Chemical Co., which makes materials used in agrochemicals and animal nutrition.

Axalta Coating Systems Ltd., whose products help keep heavy machinery from corroding, said a broader drop in industrial demand would contribute to a “moderately challenging” second half. “We did see some market softening,” CEO Robert Bryant said on a conference call.

Heavy machinery: Caterpillar Inc. dialed back expectations for profit growth this year after North American oil and gas sales decreased in the second quarter amid lower demand for new equipment in the Permian Basin. The bellwether company’s gloomy outlook was seen as a dire sign for the blue-collar side of the economy.

At Illinois Tool Works Inc., welding equipment sales slid in the second quarter after gaining earlier in the year. CEO Scott Santi said the company’s filler metal business was still growing in North America, which implies that there’s still plenty of welding activity, just a slowdown in capital investment.

“Overall it looks much more like a short-term pause -- some tentativeness certainly -- impacting capital investment decisions,” he said on a call Friday.

To contact the reporter on this story: Crayton Harrison in New York at tharrison5@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, ;Crayton Harrison at tharrison5@bloomberg.net, Jeff Kearns

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