General Motors said strong sales and demand for vehicles suggest no signs of an economic slowdown, but the company is preparing for a possible recession, just in case.
GM reported a sharp drop in profits on Tuesday, but that was caused by Covid lockdowns in China, one of its biggest markets, and other supply chain issues. The automaker actually posted an unexpected revenue gain.
But executives said that despite strong demand, the company is ready if the US or global economy falls into recession, as a growing number of economists fear.
“While demand remains strong, there are definitely growing concerns about the economy,” CEO Mary Barra said in comments to investors. She said the company is preparing for a possible downturn by cutting discretionary spending and limiting hiring.
“We have also modeled many downside scenarios and stand ready to take deliberate action when and if needed,” she said.
Recessions usually cause demand for new cars to plummet and hurt the auto industry.
The most recent survey of members of the National Association for Business Economics released on Monday found that 43% think a recession in the United States over the next 12 months is more likely than not. That’s up from just 13% who believed it in April. And on Monday, Walmart, the nation’s largest retailer, announced it was cutting prices on some products and lowering its profit forecast due to lower consumer spending.
GM does not yet see signs of a recession, given strong demand for new vehicles, Chief Financial Officer Paul Jacobson said in response to questions from the media.
“We don’t see anything that indicates short-term issues, but we have to be aware of the noise that’s out there and what other people are seeing,” he said. “We’re going to be very nimble and very nimble and respond to that.”
Recently, Tesla announced plans to cut salaried staff, in part because CEO Elon Musk said he had a “super bad feeling” about the economic outlook. And a recent Bloomberg report said Ford was also planning payroll cuts. Ford said he would not comment on the “speculation.” But Jacobson said GM “is not currently running any scenarios where we are considering layoffs.”
Jacobson did not offer an opinion on the chances of a recession over the next year, saying, “I don’t like to get into predictions. Our job is to react, plan and prepare.
He said all of his customer data, including credit reports from GM Financial, show a lot of continued strength among American consumers and pent-up demand to buy vehicles.
“But we are monitoring and we will make sure to adjust the business according to our needs,” he added.
GM tried to reassure investors, saying it expects to hit its annual profit target, despite economic worries.
“We feel like we’re in a really good position,” Jacobson said. “We believe we are on track to deliver the year we [forecast] at the beginning of the year.”
For the second quarter, GM (GM) reported adjusted profit of $1.7 billion, compared with $2.9 billion a year earlier, about $60 million lower than expected.
But revenue rose $1.6 billion to $35.8 billion, easily beating forecasts that predicted lower revenue. The number of vehicles sold worldwide by GM dealers and distributors remained about the same as first-quarter sales, but fell 19% to 1.4 million from a year ago.
Limited vehicle supply and strong demand, particularly in North America, drove prices up. The strong pricing environment added $1.8 billion to the company’s results in the quarter.
Part of the decline in vehicles sold was due to the lockdown in China, and part was due to the continued shortage of computer chips and other necessary supplies. The company had 95,000 vehicles it built during the quarter but was unable to complete due to a lack of parts. About 75% of them are full-size pickup trucks and SUVs, GM’s most profitable vehicles. Jacobson said the company plans to complete these vehicles and sell them in the second half of the year, and has already made progress so far this month.
“We came away thinking we were going to produce a lot more vehicles in the quarter,” he said. “Almost all of these vehicles will return in the second half.”
The Covid shutdowns in China have limited production in Chinese factories and brought sales to a virtual standstill in the country. China has been GM’s biggest market in recent years, although U.S. sales have overtaken Chinese sales in the past quarter.
GM lost $87 million in China, the first loss there since early 2020 when the pandemic began.
Shares of GM (GM) fell nearly 3% in mid-morning trading after the report.