General Motors said strong sales and demand for vehicles doesn’t suggest any signs of an economic slowdown, but the company is preparing for a possible recession — just in case.
GM reported a sharp drop in earnings Tuesday, but that was caused by Covid lockdowns in China, one of its largest markets, and other supply chain issues. The automaker actually posted an unexpected gain in revenue.
But executives said that despite the high demand, the company is prepared should the US or global economy fall into a recession, as a growing number of economists fear.
“While demand remains strong, there are growing concerns about the economy to be sure,” said CEO Mary Barra in comments to investors. She said the company is preparing for a possible downturn by reducing discretionary spending and limiting hiring.
“We have also modeled many downturn scenarios and we are prepared to take deliberate action when and if necessary,” she said.
Recessions typically crash demand for new cars and hurt the auto industry.
The most recent survey of members by the National Association for Business Economics released Monday found that 43% think a US recession in the next 12 months is more likely than not. That’s up from just 13% who believed that back in April. And Monday, Walmart, the nation’s largest retailer, announced it was cutting prices on some goods and trimming its earnings forecast due to softer spending by consumers.
GM is not yet seeing any signs of a recession, given the strong demand for new vehicles, said CFO Paul Jacobson in response to questions from media.
“We’re not seeing anything that indicates any near term issues, but we have to be conscious of the noise that is out there and what other people are seeing,” he said. “We’re going to be very agile and very nimble and respond to that.”
Recently Tesla has announced plans to trim salaried staff, due partly due to CEO Elon Musk saying he has a “super bad feeling” about the economic outlook. And a recent Bloomberg report said that Ford is also planning salaried staff cuts. Ford said it wouldn’t comment on “speculation.” But Jacobson said that GM is “not running any scenarios right now where we contemplate layoffs.”
Jacobson wouldn’t give an opinion on the chances of a recession during the course of the next year, saying “I don’t like to get into the odds of predicting. Our job is to respond and plan and prepare.”
He said that all data on its customers, including credit reports from GM Financial, show a lot of continued strength among US consumers and pent-up demand to buy vehicles.
“But we’re watching and we’ll make sure we adjust the business as we need too,” he added.
GM tried to assure investors, saying it expects to hit its full-year earnings target, despite the economic worries.
“We feel like we’re in really good position,” Jacobson said. “We feel like we’re on track to deliver the year we [forecast] at the beginning of the year.”
Drop in profit despite increased revenue
For the second quarter, GM (GM) reported adjusted earnings of $1.7 billion, down from $2.9 billion a year earlier, falling about $60 million short of forecasts.
But revenue was up $1.6 billion, to $35.8 billion, easily topping forecasts that called for a drop in revenue. The number of vehicles sold worldwide by GM’s dealers and distributors remained roughly on par with first quarter sales but were down 19% to 1.4 million compared to a year ago.
The limited supply of vehicles and strong demand, especially in North America, drove up prices. The strong pricing environment added $1.8 billion to the company’s results during the quarter.
Part of the drop in vehicles sold was because of the lockdown in China, and part of it was due to the continued shortage of computer chips and other needed supplies. The company had 95,000 vehicles that it built in the quarter but couldn’t complete due to a lack of parts. About 75% of those are full-size pickups and SUVs, GM’s most profitable vehicles. Jacobson said the company expects to complete those vehicles and sell them during the second half of the year, and was already making progress so far this month.
“We went in thinking we were going to be producing a lot more vehicles in the quarter,” he said. “Substantially all those vehicles will come back in the 2nd half of the year.”
The Covid shutdowns in China limited production at Chinese factories and brought sales in the country to a near halt. China has been GM’s largest market in recent years, although US sales topped Chinese sales in the most recent quarter.
GM lost $87 million in China, it’s first loss there since early 2020 at the start of the pandemic.
Shares of GM (GM) were down nearly 3% in mid-morning trading following the report.