Talk is cheap: Bellwether earnings provide better insights on economy

Talk is cheap: Bellwether earnings provide better insights on economy
© Getty Images

It is earnings season, the time when companies report their quarterly results. Investors and stock analysts dissect the reports, searching for insights they can use to pick stocks that will do well and avoid those that will do poorly.  But earnings reports aren’t just for investors. 

Policymakers who wouldn’t dream of trading stocks should spend some time reading what the companies say about their businesses. 


Companies often say things that policymakers can use to gauge how well economies and large sectors in economies are doing and about how well those economies are likely to do in the near future. 

Of course, not all companies are equally interesting. Some companies are considered to be “bellwethers” because their reports contain particularly useful information. 

Caterpillar — the maker of bulldozers, locomotives, power-generation, mining and heavy construction equipment — is one of the bellwethers. 

Caterpillar announced profits that investors saw as ugly, and the stock dropped over 6 percent after the results came out. But the results paint a more positive picture for policymakers who focus on economies rather than on company profits. 

Caterpillar’s sales into the North American construction industry showed a healthy increase. If construction companies are buying more of Caterpillar’s equipment, it is because they expect to do more building in the near future. 

Spending actual money to buy equipment is a more reliable measure of what companies expect than are answers to surveys that ask them what they expect. You don’t have to think much to check a box on a survey, but you think a lot before you buy big, expensive equipment.

Caterpillar did not sell more construction in most of the rest of the world. Economies like Brazil and Argentina were flat. Policymakers should not expect construction to drive economic expansion in Latin America and other non-U.S. regions. 

Sales in China, the country whose construction boom has awed the rest of the world, fell flat. Policymakers who hope that China will drive global economic expansion should temper their expectations. Caterpillar is a good bellwether for China because no U.S. company is better than Caterpillar at doing business in China. 

Caterpillar has over 20 manufacturing plants in China and backs the plants with a China-based supply chain. They have local people in company leadership. If Caterpillar sees a slowdown in construction equipment sales, it is not because they are a semi-competent American company. It is because companies that do construction in China don’t expect activity to increase in the near future. 

Caterpillar also is a bellwether for the data-center sector of the economy. The company provides power generation equipment to data centers and saw a 20-percent increase in sales. That sector of the economy is likely to remain strong.

If Caterpillar is a bellwether for sectors of the economy that use heavy equipment, Procter & Gamble (P&G) is a bellwether for a very different sector: the consumer sector, which by some measures is the biggest sector of the American economy. 

P&G sells Tide detergent, Crest toothpaste, Olay beauty products, Head & Shoulders shampoo, Gillette razors and blades and a dozen or so other brands many of us have in our kitchens and bathrooms.

P&G hasn’t gotten as much love from investors as it would like, but its results yield some interesting insights into how and what consumers are doing. P&G overall sales news is boring. The interesting news is the change in P&G’s sales mix — how much of each of its product lines P&G sold. 

In the beauty products segment, sales were up 8 percent, mostly due to a shift in product mix to what P&G calls “super-premium” products. Consumers are not buying more beauty products, but they are buying products that are more expensive. 

Oral care sales increased due to a shift to premium products. The same goes for fabric care sales (think Tide and Febreze) and feminine care products. 


Whatever consumers say in surveys, they haven’t abandoned P&G’s higher-priced brand name products for cheaper generic products; they are going the other direction, shifting to premium products. 

If you measure consumer sentiment by what they buy instead of by what they report, consumers are not so worried about trade wars, shutdowns or the economy that they are cutting back on routine, small-ticket purchases. 

What about consumers in China? P&G says it sees no sign of a slowdown in consumer spending. China may be constructing fewer buildings and highways, but consumers are spending more on diapers. And, as in the U.S., they are buying premium diapers.  

Policymakers can look at a lot of reports with a lot of numbers and see a lot of contradictions when they are trying to gauge domestic and global economies.

They also should look at the results of bellwether companies because those results show who is actually spending money on what, not what people say on surveys. People don’t always put their money where their mouth is.

Erik Gordon is a clinical assistant professor at the University of Michigan's Ross School of Business.