Stock market investors got a nice respite on Monday, as Wall Street was able to claw back some of the ground it had lost the previous week. However, it appeared on Tuesday morning that the bounce could be short-lived, as futures contracts on the Dow Jones Industrial Average (^DJI +0.36%), S&P 500 (^GSPC +0.44%), and Nasdaq Composite (^IXIC +0.54%) had fallen by three-quarters of a percent an hour before the start of the regular trading session.
The Federal Reserve has been aggressive in its moves to tighten monetary policy and boost interest rates, with the goal of getting inflation under control. Consumers around the world have felt the pinch of higher prices for the goods and services they need, but it hasn't always been as clear what impact inflation has had on the business world. That came through a lot more clearly Tuesday morning after Ford Motor Company (F +0.09%) gave details about how the current macroeconomic environment is putting pressure on its auto business.
What Ford said
Ford shares were down nearly 5% in premarket trading as investors digested what the auto giant said about its likely financial performance for the third quarter of 2022. Although not all of the news was bad, investors nevertheless had to adjust some of their expectations about what Ford's results could look like for the rest of the year and beyond.
Ford has suffered from supply shortages of key components for quite a while now, and those supply chain challenges continue to hurt the company. The automaker expects it will have to build between 40,000 and 45,000 high-margin trucks and SUVs on a "vehicles on wheels" basis, holding them back until Ford receives the parts necessary to complete them. Once those parts come in, Ford plans to send them on to dealers for sale, but with delays pushing those deliveries into the fourth quarter.
In addition, suppliers are complaining about the higher costs they face in coming out with vital parts and components. As a result, those suppliers have negotiated with Ford to try to pass on some of their higher costs to the automaker. Ford estimates that as a result, its supplier costs will be roughly $1 billion higher than it had expected to pay.
Ford therefore expects that its adjusted pre-tax income will be between $1.4 billion and $1.7 billion. That's below its previous guidance for the quarter, but Ford was adamant that it wasn't changing its full-year projections for between $11.5 billion and $12.5 billion in adjusted pre-tax income.
NYSE: F
Key Data Points
Can Ford catch up?
The implication in Ford's forecast is that the automaker hopes to resolve all of its financial pressures by the end of 2022. Ford is taking the optimistic view that supply chain issues will merely result in delayed business rather than lost business.
Given the recent tightness in vehicle markets, Ford's optimism could be warranted. With consumers waiting weeks or even months for the cars and trucks they want to come into stock, it's reasonable to think that a hungry consumer market could absorb 40,000 to 45,000 extra vehicles, even coming toward the end of a model year when most auto dealers are looking to clear out inventory to make room for newer vehicles.
The wildcard, though, is whether inflation will hurt consumers' ability to keep buying cars and trucks at the same rate. Even with recent declines in gasoline prices, many people don't have as much discretionary income to afford a vehicle upgrade right now. Higher interest rates could boost the costs of consumer debt and take even more money away from potential buyers.
If Ford keeps seeing shoppers come in its dealers' doors, then its prediction that it will weather its supply chain storms could prove investors wrong about Tuesday's stock-price drop. But if inflation hurts its customers, then Ford could have a longer-term problem on its hands.
