Increased Sales May Not Keep Pace with Rising Commodity Costs

The final three months of 2010 were incredibly encouraging for Corporate America. The S&P 500 companies reported sales figures that largely outpaced expectations. Profits rose an average of 37% over the final quarter of the year, with sales figures that showed at least a 6% increase. The implications of this increase in profit and sales numbers continue to drive consumer confidence and seem to imply that the economy is still healing from the recent recession.

Sales Indicate Real Demand

One of the most positive aspects of the increased sales figures is that they seem to show profits based on actual demand rather than profits that resulted from companies cutting back. That means that the improvements are actually signs of economic health rather than conservative measures intended to cut costs out of the budgets of corporations. The progress of the last quarter represents actual increased sales, which have been slow to pick up in recent years. Economic recovery is not entirely complete, but the last quarter sales figures are a sign that it is still moving in the right direction.

Increased Foreign Competition is a Concern

Some companies are concerned that commodity costs will rise due to an increase in global competition. Corporations are finding a weaker domestic market for their goods as the demand for foreign goods is rising. This could cause the corporations to find new ways to increase demand in the face of competition from markets that can afford to lower their prices. Conversations about increased spending and weaker international demand have already caused dips in the stock market as investors become concerned that the 2010 sales increases are not sustainable numbers. If commodity prices rise as expected, the combination of high competition and more expensive manufacturing processes could be damaging to the economic turnaround.

Businesses Could be Forced to Pass Along Higher Costs

As companies face higher costs in 2011, economic researchers are concerned that those increased costs will need to be passed on to consumers in the form of rising prices. If prices can remain stable over the next year, consumer confidence would continue to rise. If prices begin to rise later in the year, however, they could have a negative impact on the country’s ability to climb out of the recent financial struggles. Rising prices on consumer goods due to the rising cost of manufacturing resources without a substantial decrease in the unemployment rate could set the economy back by at least a year.

Basic Materials More Expensive

Although the sales increases are a positive sign, many companies remain guarded in their optimism. Many of the biggest United States manufacturers are worried about increases in their manufacturing costs over the next year. Companies are already setting aside billions of dollars that they expect to need to use for increased commodity costs in the near future. Some companies expect to increase spending in their research and development areas as well. Many analysts worry that these cost increases will not be covered by the modest gains in sales and profit figures from the end of 2010.