Merryn's Blog

What washing machines tell us about the US economy

Despite reporting better than expected profits, Electrolux is to close two of its US factories with the loss of 950 jobs, as consumers continue to retrench.

Many analysts cheered the latest results from Electrolux, the world's second largest manufacturer of electrical appliances. Adjusted operating profits beat targets. But hidden behind that good news was a warning.

Hopeful eyes have been turning east recently as China continues to post strong figures the latest GDP growth rate clocked in at an impressive 8.9%. As China creates new tiers of wealthy consumers, say the bulls, the global economy will continue to strengthen.

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But meanwhile, the primary engine of the boom years the US consumer continues to pull back. Electrolux confirmed as much by announcing the closure of two washing machine factories, employing 950 staff, in Iowa. And that's in spite of the chief executive, Hans Straberg, declaring "almost everything went our way this quarter".

And it's US consumers that ultimately matter. The US contributes over 20% of global GDP (source IMF), and generates well over three times the wealth of China in US dollar terms. If they suffer, we all suffer. Sure, one day that balance will change as China continues to power on. But for now, firms like Electrolux remind us that the world's biggest spenders are still in their bunker. And that spells bad news for the raft of highly cyclical consumer stocks that have surged since March.

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So, anyone who is cheered by the latest US figures (third quarter GDP rose by an annualised 3.5%) into thinking we are past the worst, should think again. And stick with quality defensive shares.




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