(Bloomberg Opinion) -- Prices are surging for flights and industrial fasteners, but customers just keep on buying.
Fastenal Co., a distributor of manufacturing odds and ends, and Delta Air Lines Inc. unofficially kicked off the industrial earnings season on Wednesday. After weeks of hand-wringing by investors over concerns that rising inflation would kneecap the economic recovery, both companies' updates were a pleasant surprise. Fastenal said net sales increased 20.3% in the first quarter, its strongest growth in at least a decade. Price increases explain part of the rise — about 580 to 610 basis points. But that still means the vast majority of the growth came from manufacturing and construction customers buying more items, a sign that underlying demand remains robust. Delta, meanwhile, said it returned to profitability in March and would make money in the June quarter. That comes despite expectations for fuel prices to jump to as much as $3.35 a gallon in the second quarter (including a 20-cent contribution from its refinery operations). Adjusted jet fuel costs for the company averaged $2.79 in the recently ended period and $2.10 for the final three months of 2021.
This can't go on forever. Fastenal noted that inflation in fuel prices, shipping services and stainless steel continued in the first quarter and said that the company would increase its prices as needed to offset that impact. Prices paid to U.S. producers jumped 11.2% in March from a year earlier and 1.4% from February, both records, the Labor Department said separately on Wednesday. Eventually, there is some breaking point at which price increases start to deter purchases. But at least as far as these two corners of the industrial world are concerned, that point hasn't been reached yet.
Read more: Industrial Worry Shifts From Supply to Demand
There are idiosyncratic reasons industrial distributors and airlines might be more isolated from inflationary pressures. After two years of heavy spending on physical goods, consumers are prioritizing travel and are willing to pay up to take long-delayed trips. The amount that American travelers said they would spend on trips this year fell to about $4,000 in mid-March from $4,283 in mid-February, according to a survey of 1,200 travelers by Destination Analysts. Even so, some 61% of travelers said vacations were a high priority in their budgets for the next three months. Industrial distributors have historically demonstrated stronger pricing power and inflationary responses than end manufacturers. Fastenal said price increases largely offset the increase in cost in the most recent quarter, resulting in a neutral impact to its gross margin. Such a balancing act has been elusive for many of its manufacturing customers thus far.
Read more: Travel Defies Inflation's Spending Squeeze
Even so, the optimistic demand outlook at Fastenal was echoed at this week's Industrial Supply Association conference in Houston: No one likes price increases, and there's always some degree of pushback, but executives said that they had ultimately been able to pass on higher costs and that lingering supply chain constraints mean customers still care more about availability than price for now. Fastenal's earnings update also included some optimistic nuggets on freight markets, inventory and labor conditions for the rest of the manufacturing sector. Inflation accounted for roughly two-thirds of the 22.6% increase in Fastenal's inventory in the first quarter, a smaller proportion than in the fourth quarter of 2021. That reflected improved product flow into the company's hubs. Supply chain conditions remain tight but have stabilized; that's allowing customers to plan better and think strategically about work-arounds, Fastenal said. The company attributed the record 106 deals it signed in the quarter for its on-site supply chain management and parts provision services to a “normalization of the business environment.”
Fastenal was also finally able to hire more workers after months of difficulties. Its full-time equivalent employee headcount is up 864 over the past year, but nearly three-quarters of that increase came in the first quarter. This bodes well for a manufacturing industry that as of February had more than 800,000 job openings in the U.S.
There's a lot of earnings season yet to come. Results further up the food chain at industrial manufacturers and aerospace suppliers may look messier. But this is as good of a start as investors could have hoped for.
More From Other Writers at Bloomberg Opinion:
- Jet Fuel Sees Crazy Prices After Two Unloved Years: Javier Blas
- What to Expect as Inflation Gets More Entrenched: John Authers
- A Cooler Jobs Market Is Just What This Economy Needs: Conor Sen
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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