One thing is clear from listening to first-quarter earnings calls in the US: corporate America has been bedevilled by supply chain problems.

US tractor maker John Deere said it expected increased supply chain pressures through the balance of this year and is working closely with suppliers to secure parts and components. Paint maker PPG Industries noted supply chain challenges for some of its products including epoxy coatings and said “we’re operating hand-to-mouth”, even if it was doing better than some competitors.

And the automotive industry has reported shortages of everything from plastic to seats and, most notably, semiconductors.

These bottlenecks have stemmed from issues such as the paucity of raw materials, port congestion and labour shortages that have slowed down the production of goods or their delivery to the market.

Global logistics company CH Robinson said ships at West Coast ports in the US are waiting between 15 to 20 days to berth, compared with no waiting period in a normal market. For every truck there are more than seven loads of freight to be carried, compared with three in more normal times.

And this has been exacerbated by strong demand in the US, which has recovered faster than other developed economies boosted by massive fiscal and monetary stimulus and a rapid vaccination roll out.

The Institute for Supply Management’s April survey of purchasing managers across the US showed a backlog of orders that was the highest on records that date back to 1993. The average lead time for sourcing production materials increased in April by four days to 79 days — the highest since ISM began collecting this data in 1987.

These supply chain problems have complicated companies’ ability to plan for inventory, deliver products on time and raised the cost of doing business.

They have stoked fears about inflationary pressures, an overheating economy and prompted the highest number of S&P 500 companies, nearly 190, to cite inflation on their first-quarter earnings call in at least 10 years, according to data provider FactSet. In the ISM’s April survey of purchasing managers, more than eight in 10 manufacturers reported paying higher prices for materials.

Deere said labour is one of the biggest challenges, “whether it’s warehousing or truck drivers or port labour”. Some companies in a similar position are trying to lure people back with higher pay and sign-on bonuses.

“If people need to be enticed back to work then I think margins will become a pretty significant issue, just because that dominates the cost structure for most companies,” says Bill McMahon, chief investment officer of active equity strategies at Charles Schwab Investment Management.

Still, 86 per cent of companies on the blue-chip S&P 500 have reported better than expected earnings per share in the first quarter, according to FactSet. And with 95 per cent of companies having reported results thus far, “blended” earnings — that combines results from companies that have already reported and estimates for those that have not — have increased 51.9 per cent in the first quarter from a year ago. If that holds, it will be the highest EPS growth in 11 years.

Higher input costs are passed on to end customers

What’s more, margins haven’t been eroded yet. The blended net profit margin — how much profit is produced as a percentage of revenue — for the first quarter is 12.8 per cent, which, if it holds, will be the highest since FactSet began tracking this metric since 2008.

Companies have been able to protect their margins by sourcing from elsewhere.

“But it’s not as simple as turning off supply in one area and turning it on in another,” says Melanie Nuce, senior vice-president of corporate development at GS1 US, a non-profit information standards organisation. She notes on supply chains, companies are “being asked to have a crystal ball more than ever before”.

Companies are safeguarding their margins by cutting costs, improving yield or by raising prices. Colgate-Palmolive, Kimberly-Clark, Mondelez and Whirlpool are among those that have planned to kick these costs to customers.

Transmitting these costs is not easy or painless but Patrick Palfrey, senior equity strategist at Credit Suisse, argues: “The honest truth is inflation is a huge benefit for companies.”

“In reality higher input costs always get passed on to the end customer and we see revenues go up as a result. It takes a quarter for companies to pass on those costs but they do pass them on.”

So, while Federal Reserve chair Jay Powell is unclear on when the bottlenecks will resolve, corporate margins are expected to hold up well.