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What Alcoa's Earnings Tell Us About the Economy

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Investors often consider aluminum producer Alcoa (NYSE: AA  ) an economic bellwether. Assuming that's true, what do the company's latest earnings results tell us about the economy's health and direction?

At first glance, things look promising: Alcoa's earnings more than doubled. If you think that's good news for the bigger picture, you might want to curb your jubilation. Alcoa's earnings increased mostly because of rising aluminum prices and growing demand -- but prices and demand can each mean different things to the overall economy.

Strong demand?
Let's tackle demand first. Alcoa's revenue increased by 27% in the quarter, implying, perhaps, that recovering manufacturers were hungry for raw materials. But, again, the story doesn't end here. A third of this growth simply owed to higher aluminum prices. Only half of the growth came from increased volume, and that increased demand was unevenly distributed across markets and sectors.

In North America, Alcoa has a surprisingly positive view on the automotive sector. After 30% growth in the first quarter, demand in the sector grew just 5% in the second. But CEO Klaus Kleinfeld attributes this mostly to the Japan disaster, and he actually expects healthy 8% to 11% growth for the year. This is not the case for the commercial building and construction sector, where Alcoa expects a decline of 9% to 12% in North America.

Kleinfeld believes global aluminum demand will grow 12% this year, but this won't necessarily be a straight and steady recovery. As the CEO put it, "The economic recovery is uneven." Quite the understatement!

Inflation, inflation, inflation
Now let's move to prices. The higher aluminum prices Alcoa enjoyed were offset by increased costs for raw materials and oil. Those higher commodity prices can cause inflationary pressures in the broader economy. Inflation perhaps isn't rearing its head in the U.S. yet, but it certainly is in China.

A weaker dollar also dented Alcoa's bottom line. That's bad for the company, but how will it affect the economy? True, a lower dollar can benefit exporters, but it can also drive up commodity prices, which in turn can lead to -- you guessed it -- inflationary pressures.

More tells?
Last month, bellwether shipping company FedEx (NYSE: FDX  ) reported a respectable earnings increase. Much like Alcoa, higher fuel prices affected its results, but FedEx managed to offset them by charging higher prices and implementing tight cost controls. Like Alcoa, the shipper had a positive outlook.

In nine days, fellow bellwether General Electric (NYSE: GE  ) will also report. The conglomerate's businesses span many sectors of the economy, including energy, health, transportation, finance, and media, making its report even more telling. I'll be keeping a close eye on its industrial orders, and how it coped with higher oil prices.

Alcoa's earnings report contains positive signs regarding the economy, suggesting recovery in several sectors. But it wasn't all good by a long shot. The end of the housing crisis still seems far off, and inflationary pressures could be building. All told, the report didn't really tell us much, beyond the fact that we're still spinning in the mud.

Fool contributor Melly Alazraki owns shares in Alcoa and GE. The Fool has a disclosure policy. The Motley Fool owns shares of FedEx. Motley Fool newsletter services have recommended buying shares of FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (6)

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  • Report this Comment On July 14, 2011, at 12:39 PM, Brettze wrote:

    Melly, aluminium p rices can be compared to gasoline price at $1.50 a gallon. Everyone would love that... You see, aluminium prices has not caught up with the rest of the metal pack. In case, you were not aware ... copper had gone to $5 from around $1 in past decade, nickel to $10-12 from $3, moly to $25-30 from $5 , you should know gold used to fetch less than $300 ditto for silver at $5 ,etc... Why is aluminium prices still stuck in the rut, well, China is almost 100% self sufficient and not requiring to import much. China keep all the obsolete equipment used to make new aluminium running. America is anxious to help China keep it that way with unlimited shipments of coal ... China ought to shut down the old smelters. Something got to give and aluminium will soon catch up . Moreover, actually not much aluminium is made annually if you compare it to steel which is already over one billon tons annually agaginst aluminium at 40 millon. Yet, we are still drowning in oversupplies of aluminium. It is the demand that is lagging despite China's torrid growth in demand. If you look at the annual production of aluminium, you will see how easily it will be to outstrip the supply very shortly.. It will happen much sooner than you think. Automobiles will be the fastest growth in aluminium demand and solar thermal (parabolic mirrors) can also soak up the supplies very quickly. We are still fumbling with obsolete photovoltaics until we finally realize that mirrors is much more economical than those silicon vareity for solar energy. Mirrors is made of aluminium or silver and aluminium is much cheaper and more durable. We are just pretending way too hard that we can do without more aluminium so to avoid paying higher prices for aluminium as we are supposed to , anyhow. Go ahead and pretend while millons are still unemployed.. It is a disgrace already!!

  • Report this Comment On July 14, 2011, at 12:48 PM, Brettze wrote:

    Look at photovoltaics,, there is oversupplies there already . Why? Because it is not very efficient in converting sunlight into electricity.. only between 10-20%.... Solar thermal technology that CONCENTRATES sunlight into very powerful sources of energy (heat or steam) which can be converted into electricity or direct heat . We rely too much on "clean" natural gas while direct concentrated sunlight can do the job as good as natural gas.. We can heat our homes , buildings with concentrated sunlight through mirrors.. We are just pretending that natural gas is more affordable than concentrated sunlight.. You see, how we are still fooling ourselves with thinking that we can swing ourselves without scaring up naturla gas prices which we will as long as we ignore solar thermal technologies.. We are fooling ourselves.. There is still more innovation that can grow solar energy almost infintely.. We are still WEDDED TO FOSSIL FUELS because we are still holding TRILLONS in investments on those fossil fuel assets. We are still UNWILLING TO REALLOCATE our capital to solar thermal technology SIMPlY BECAUSE WE ARE TRYING TOO HARD TO AVOID ALUMINIUM DEMAND... AT ALL COSTS IF IT MEANS MILLONS JOBLESS!!! WHAT A DISGRACE!!!!!!!!!!!!!!!!!

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