Moment of truth approaching for U.S. manufacturers

Fri Oct 12, 2012 1:39am EDT
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By Scott Malone

BOSTON (Reuters) - How far can cost-cutting get you in a slowing economy?

That's the question the U.S. manufacturing sector will answer over the coming weeks. Through the first half of the year, big industrial companies including General Electric Co (GE.N: Quote), United Technologies Corp (UTX.N: Quote) and Caterpillar Inc (CAT.N: Quote) notched impressive profit growth despite shaky demand, largely thanks to their success in boosting productivity.

But that bit of management magic may have run its course - Wall Street expects manufacturers to report a sharp slowdown in earnings growth in the just-ended third quarter, as Europe's deteriorating economy, slowing growth in Asia and the risk of the United States going over a self-imposed fiscal cliff cause customers to throttle back spending even further.

Warning signs abound. In recent weeks, Caterpillar, United Tech and FedEx Corp (FDX.N: Quote) have noted that the world economy is slowing - and that they are bracing for an extended period of tepid growth.

FedEx, the world's No. 2 package-delivery company, this week unveiled plans to cut costs at its air-express operation by about $1.7 billion over the next four years, because it no longer expects that business to maintain its prior growth rate, which was twice that of global GDP growth.

Despite those cost-cutting plans, analysts expect profit for FedEx's 2013 fiscal year, which ends in May, to be roughly flat after rising about 40 percent in fiscal 2012 - suggesting that belt-tightening can only do so much to offset a weak economy.

"We are operating in the most tepid post-recession recovery in the modern era," David Bronczek, who heads the company's air express arm, told investors.

Others have been more bullish - GE late last month raised its full-year sales growth target, saying demand for jet engines, electric turbines and other heavy equipment has held up despite a tricky global economy.   Continued...

A scratched and worn Caterpillar logo is pictured at the back of a bulldozer in the rental equipment yard of Holt Caterpillar, the largest Caterpillar dealer in the United States, in San Antonio, Texas March 19, 2012. REUTERS/Richard Carson