Investors often consider aluminum producer Alcoa
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.
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.
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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.