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    The war against inflation is a long way away from being won

    Financial markets drew optimism from two reports last week showing that inflation is easing.
    There are still troubling undercurrents in the economy, such as rising fuel prices and a clogged housing market that could cause problems ahead.
    Citigroup economists are worried that ideal conditions, which have included resilient consumer spending, stronger supply chains and receding prices in key areas, may not last.
    “No victory laps. No mission accomplished. Our work is not done,” Jared Bernstein, chair of the White House’s Council of Economic Advisers, told CNBC.

    A food shopper searches for vegetables July 1, 2023 at the Hannaford supermarket in South Burlington, Vermont. 
    Robert Nickelsberg | Getty Images

    Don’t break out the party hats just yet: Despite recent signs that inflation is cooling, the fight to bring down the meteoric price increases of the past three years is far from over.
    Financial markets drew optimism from two reports last week showing that the rate of growth in both the prices that consumers shell out at the checkout and those that businesses pay for the goods they use had hit multiyear lows.

    But those data points reflected relative rates of change, and didn’t capture the overall surge that led to the highest inflation level in more than 40 years. What’s more, there are still troubling undercurrents in the economy, such as rising fuel prices and a clogged housing market that could cause problems ahead.
    “No victory laps. No mission accomplished. Our work is not done,” Jared Bernstein, chair of the White House’s Council of Economic Advisers, said during a CNBC “Squawk Box” interview Monday morning. “But we’re very happy to see some breathing room for American households.”
    The consumer price index, a widely followed gauge that tracks dozens of goods and services across multiple sectors, increased just 0.2% in June, taking the annual rate to 3.1%. That latter figure is down precipitously from its 9.1% peak a year ago, which was the highest in nearly 41 years, and is at its lowest since March 2021.

    Also last week, the Labor Department reported the producer price index had risen just 0.1% in June and the same amount on an annual basis. The 12-month PPI reading had peaked at an annual rate of 11.6% in March 2022, its highest ever in data going back to November 2010.
    Sharp declines in both readings raised hopes that, with inflation getting ever closer to the Federal Reserve’s 2% target, the central bank could ease up on interest rate hikes and the tight monetary policy that has been implemented since the early part of 2022.

    A temporary lull?

    “Cooling inflation. Slowing but still positive job growth. These are the things that soft landings are made of,” Citigroup economist Andrew Hollenhorst said in a note. “Near-term price inflation may do little to contradict rising Fed official and market hope that a benign outcome is being achieved.”
    However, Citi’s economic team is worried that the ideal conditions, which have included resilient consumer spending, stronger supply chains and receding prices in key areas such as energy and vehicles, may not last.
    “Tight labor markets, elevated wages, and upside risks to shelter and other services inflation mean we do not share this optimism,” Hollenhorst added. “Absent a tightening of financial conditions, inflation may reaccelerate in early 2024.”
    For their part, Fed officials have indicated they see their benchmark rate rising by at least half a percentage point by year-end. Chair Jerome Powell has repeatedly warned about reading too much into a few months of positive inflation data, noting that history shows such moves can be head fakes.

    Warning signs abound

    There is certainly reason for caution if not outright skepticism about where inflation is headed.
    The easiest one to point to is that the CPI may be on a sharp decline when including all items, but the move is less impressive when excluding volatile food and energy prices. Energy has tumbled nearly 17% over the past year and can turn around quickly.
    So-called core inflation rose 0.2% in June and was tracking at a 4.8% annual rate, much higher than the Fed would like.
    Housing is another focal point.
    Central to the Fed’s expectation that inflation will ease is the belief that rental costs will begin to subside after a housing price boom in the early days of the Covid pandemic. Shelter costs, though, rose another 0.4% in June and are now 7.8% higher than a year ago. That’s just off the peak earlier this year and still near the highest since the early 1980s.
    When looking at prices through a longer lens, the CPI is still up about 18% from where it was three years ago, the recent easing notwithstanding.
    There are other nettlesome points as well.
    Health insurance costs have fallen nearly 25% over the past year, due in large part to a nebulous adjustment the Bureau of Labor Statistics applies to the category. The adjustment ends in a few months, meaning that category, though a small contributor to the CPI weighting, could become more of a factor.

    Inflation has inflicted much pain

    Fed officials have pledged not to be complacent about inflation, repeatedly expressing concern over the impact on lower-income families and workers.
    Small businesses also have been hit hard both by rising prices and the higher interest rates the Fed has used in its efforts to restore price stability.
    “Inflation has certainly changed the cost structure, in some instances maybe permanently for a lot of small businesses,” said David Cody, co-founder and co-CEO of Newity, which started during Covid as a conduit for Paycheck Protection Program loans and is now focused on providing loans solutions for small businesses.
    “Not only do you have headwinds for growth as things slow down, which is what’s happening, but you also have high absolute rates and pricing pressure on inputs,” he added.
    Coty said the current environment is highly challenging for small business financing and he doesn’t expect to see any benefits from lower inflation for a while.
    “Things have to move quite a bit to change the landscape in a material way for those small businesses considering kind of all the headwinds that have been created in the last couple of years, including the pandemic,” he said.
    To be sure, there’s also a good deal of evidence showing inflation heading in the right direction.
    The easing in supply chain problems is probably the biggest positive factor. A New York Fed gauge of global supply chain pressures is near its lowest level since 2008.
    Also, as consumers eat through excess savings built up from trillions in fiscal and monetary stimulus, demand likely will abate and put downward pressure on some key categories. Those trends could push the Fed to ease its foot off the brake.
    “The underlying improvement in both core goods and services inflation won’t stop the Fed from hiking rates later this month but, assuming the trend continues, it should persuade the Fed to hold fire after that and, eventually, to begin cutting rates again in the first half of next year,” wrote Paul Ashworth, chief North America economist for Capital Economics.
    The Commerce Department on Tuesday will provide a better look at the impact that inflation is having on spending.
    Retail sales are expected to show growth of 0.5% in June, an important figure because it is not adjusted for inflation. If spending for the month does in fact exceed the level of price increases, that in itself could be inflationary.
    “With the Fed’s temporary pause in rate hikes, the U.S. economy has proved to be resilient through continued consumer spending, but continuing that trend [at] the current rate could create an elevated new normal level of spending,” said Kavan Choksi, managing director at KC Consulting.
    “The reality is that current inflation rates still hold a negative impact on consumers,” he added. “So, even though we are on the right trajectory, we still have a long way to go.” More

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    Jerome Powell’s Prized Labor Market Is Back. Can He Keep It?

    The Federal Reserve chair spent the early pandemic bemoaning the loss of a strong job market. It roared back — and now its fate is in his hands.Jerome H. Powell, the chair of the Federal Reserve, spent the early pandemic lamenting something America had lost: a job market so historically strong that it was boosting marginalized groups, extending opportunities to people and communities that had long lived without them.“We’re so eager to get back to the economy, get back to a tight labor market with low unemployment, high labor-force participation, rising wages — all of the virtuous factors that we had as recently as last winter,” Mr. Powell said in an NPR interview in September 2020.The Fed chair has gotten that wish. The labor market has recovered by nearly every major measure, and the employment rate for people in their most active working years has eclipsed its 2019 high, reaching a level last seen in April 2001.Yet one of the biggest risks to that strong rebound has been Mr. Powell’s Fed itself. Economists have spent months predicting that workers will not be able to hang on to all their recent labor market gains because the Fed has been aggressively attacking rapid inflation. The central bank has raised interest rates sharply to cool off the economy and the job market, a campaign that many economists have predicted could push unemployment higher and even plunge America into a recession.But now a tantalizing possibility is emerging: Can America both tame inflation and keep its labor market gains?Data last week showed that price increases are beginning to moderate in earnest, and that trend is expected to continue in the months ahead. The long-awaited cool-down has happened even as unemployment has remained at rock bottom and hiring has remained healthy. The combination is raising the prospect — still not guaranteed — that Mr. Powell’s central bank could pull off a soft landing, in which workers largely keep their jobs and growth chugs along slowly even as inflation returns to normal.“There are meaningful reasons for why inflation is coming down, and why we should expect to see it come down further,” said Julia Pollak, chief economist at ZipRecruiter. “Many economists argue that the last mile of inflation reduction will be the hardest, but that isn’t necessarily the case.”Inflation has plummeted to 3 percent, just a third of its 9.1 percent peak last summer. While an index that strips out volatile products to give a cleaner sense of the underlying trend in inflation remains more elevated at 4.8 percent, it, too, is showing notable signs of coming down — and the reasons for that moderation seem potentially sustainable.Housing costs are slowing in inflation measures, something that economists have expected for months and that they widely predict will continue. New and used car prices are cooling as demand wanes and inventories on dealer lots improve, allowing goods prices to moderate. And even services inflation has cooled somewhat, though some of that owed to a slowdown in airfares that may look less significant in coming months.All of those positive trends could make the road to a soft landing — one Mr. Powell has called “a narrow path” — a bit wider.For the Fed, the nascent cool-down could mean that it isn’t necessary to raise rates so much this year. Central bankers are poised to lift borrowing costs at their July meeting next week, and had forecast another rate increase before the end of the year. But if inflation continues to moderate for the next few months, it could allow them to delay or even nix that move, while indicating that further increases could be warranted if inflation picked back up — a signal economists sometimes call a “tightening bias.”Christopher Waller, one of the Fed’s most inflation-focused members, suggested last week that while he might favor raising interest rates again at the Fed meeting in September if inflation data came in hot, he could change his mind if two upcoming inflation reports demonstrated progress toward slower price increases.“If they look like the last two, the data would suggest maybe stopping,” Mr. Waller said.Interest rates are already elevated — they’ll be in a range of 5.25 to 5.5 percent if raised as expected on July 26, the highest level in 16 years. Holding them steady will continue to weigh on the economy, discouraging home buyers, car shoppers or businesses hoping to expand on borrowed money.Since 2020, the labor market has rebounded by nearly every major measure.Jamie Kelter Davis for The New York TimesSo far, though, the economy has shown a surprising ability to absorb higher interest rates without cracking. Consumer spending has slowed, but it has not plummeted. The rate-sensitive housing market cooled sharply initially as mortgage rates shot up, but it has recently shown signs of bottoming out. And the labor market just keeps chugging.Some economists think that with so much momentum, fully stamping out inflation will prove difficult. Wage growth is hovering around 4.4 percent by one popular measure, well above the 2 to 3 percent that was normal in the years before the pandemic.With pay climbing so swiftly, the logic goes, companies will try to charge more to protect their profits. Consumers who are earning more will have the wherewithal to pay up, keeping inflation hotter than normal.“If the economy doesn’t cool down, companies will need to bake into their business plans bigger wage increases,” said Kokou Agbo-Bloua, a global research leader at Société Générale. “It’s not a question of if unemployment needs to go up — it’s a question of how high unemployment should go for inflation to return to 2 percent.”Yet economists within the Fed itself have raised the possibility that unemployment may not need to rise much at all to lower inflation. There are a lot of job openings across the economy at the moment, and wage and price growth may be able to slow as those decline, a Fed Board economist and Mr. Waller argued in a paper last summer.While unemployment could creep higher, the paper argued, it might not rise much: perhaps one percentage point or less.So far, that prediction is playing out. Job openings have dropped. Immigration and higher labor force participation have improved the supply of workers in the economy. As balance has come back, wage growth has cooled. Unemployment, in the meantime, is hovering at a similar level to where it was when the Fed began to raise interest rates 16 months ago.A big question is whether the Fed will feel the need to raise interest rates further in a world with pay gains that — while slowing — remain notably faster than before the pandemic. It could be that they do not.“Wage growth often follows inflation, so it’s really hard to say that wage growth is going to lead inflation down,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said during a CNBC interview last week.Risks to the outlook still loom, of course. The economy could still slow more sharply as the effects of higher interest rates add up, cutting into growth and hiring.Consumer spending has slowed, but it has not plummeted — a signal that the economy is absorbing higher interest rates without cracking.Amir Hamja/The New York TimesInflation could come roaring back because of an escalation of the war in Ukraine or some other unexpected development, prodding central bankers to do more to ensure that price increases come under control quickly. Or price increases could simply prove painfully stubborn.“One data point does not make a trend,” Mr. Waller said last week. “Inflation briefly slowed in the summer of 2021 before getting much worse.”But if price increases do keep slowing — maybe to below 3 percent, some economists speculated — officials might increasingly weigh the cost of getting price increases down against their other big goal: fostering a strong job market.The Fed’s tasks are both price stability and maximum employment, what is called its “dual mandate.” When one goal is really out of whack, it takes precedence, based on the way the Fed approaches policy. But once they are both close to target, pursuing the two is a balancing act.“I think we need to get a 2-handle on core inflation before they’re ready to put the dual mandates beside each other,” said Julia Coronado, an economist at MacroPolicy Perspectives. Forecasters in a Bloomberg survey expect that measure of inflation to fall below 3 percent — what economists call a “2-handle” — in the spring of 2024.The Fed may be able to walk that tightrope to a soft landing, retaining a labor market that has benefited a range of people — from those with disabilities to teenagers to Black and Hispanic adults.Mr. Powell has regularly said that “without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all,” explaining why the Fed might need to harm his prized job market.But at his June news conference, he sounded a bit more hopeful — and since then, there has been evidence to bolster that optimism.“The labor market, I think, has surprised many, if not all, analysts over the last couple of years with its extraordinary resilience,” Mr. Powell said. More

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    House Committee Targets U.C. Berkeley Program for China Ties

    A House select committee is requesting more information about a university collaboration that it said could help China gain access to cutting-edge research.A congressional committee focused on national security threats from China said it had “grave concerns” about a research partnership between the University of California, Berkeley, and several Chinese entities, claiming that the collaboration’s advanced research could help the Chinese government gain an economic, technological or military advantage.In a letter sent last week to Berkeley’s president and chancellor, the House Select Committee on the Chinese Communist Party requested extensive information about the Tsinghua-Berkeley Shenzhen Institute, a collaboration set up in 2014 with China’s prestigious Tsinghua University and the Chinese city of Shenzhen.The letter pointed to the institute’s research into certain “dual-use technologies” that are employed by both civilian and military institutions, like advanced semiconductors and imaging technology used for mapping terrain or driving autonomous cars.The committee also questioned whether Berkeley had properly disclosed Chinese funding for the institute, and cited its collaborations with Chinese universities and companies that have been the subjects of sanctions by the United States in recent years, like the National University of Defense Technology, the telecom firm Huawei and the Chinese drone maker DJI.It also said that Berkeley faculty serving at the institute had received funding from the Defense Advanced Research Projects Agency and other U.S. funding for the development of military applications, raising concerns about Chinese access to those experts.In April, for example, a team from a Shenzhen-based lab that describes itself as being supported by the Tsinghua-Berkeley Shenzhen Institute said it had won a contest in China to optimize a type of advanced chip technology that the U.S. government is now trying to prevent Chinese companies from acquiring, the letter said.It is not clear what role the university had in that project, or if the partnership, or the institute’s other activities, would violate U.S. restrictions on China’s access to technology. In October, the United States set significant limits on the type of advanced semiconductor technology that could be shared with Chinese entities, saying that the activity posed a national security threat.“Berkeley’s P.R.C.-backed collaboration with Tsinghua University raises many red flags,” the letter said, referring to the People’s Republic of China. It was signed by Representative Mike Gallagher, a Wisconsin Republican who chairs the committee, and Representative Virginia Foxx, a Republican of North Carolina who is the committee chair on education and the work force.In a statement to The New York Times, U.C. Berkeley said it takes concerns about national security “very seriously” and was committed to comprehensive compliance with laws governing international academic engagement. “The campus is reviewing past agreements and actions involving or connected to Tsinghua-Berkeley Shenzhen Institute” and would “fully and transparently cooperate with any federal inquiries,” it said.The university also said it had responded to inquiries from the Department of Education with detailed information about gifts and contracts related to the institute, that it was committed to full compliance with laws governing such arrangements, and that it “follows the lead of Congress and federal regulators when evaluating proposed research relationships with foreign entities.”Universities have also emphasized that foreign governments might have little to gain from infiltrating such partnerships, since academic researchers are focused on fundamental research that, while potentially valuable, is promptly published in academic journals for all to see.“As a matter of principle, Berkeley conducts research that is openly published for the entire global scientific community,” the university said in its statement.The letter, and other accusations from members of Congress about U.S. universities with partners in China, underscores how a rapid evolution in U.S.-China relations is putting new pressure on academic partnerships that were set up to share information and break down barriers between the countries.The Chinese government has sought to improve the country’s technological capacity through legitimate commercial partnerships, but also espionage, cybertheft and coercion. Those efforts — along with a program to meld military and civilian innovation — has led to a backlash in the United States against ties with Chinese academic institutions and private companies that might have seemed relatively innocuous a decade ago.The select committee, which was set up earlier this year, describes its mission as building consensus on the threat posed by the Chinese Communist Party and developing a plan to defend the United States. The bipartisan committee, which is led by Republicans, can provide legislative recommendations but cannot legislate on its own. It has been busily naming and shaming major companies and others over ties to China in congressional hearings, investigations and letters.Tensions between the United States and China are high, and some lawmakers have called for decoupling the two economies. But severing academic ties is a tricky prospect. American universities are geared toward open and collaborative research and count many Chinese scholars among their work force. China’s significant technology industry and huge population of science and technology doctorates make it a natural magnet for many research collaborations.Still, the rapid expansion of export controls in the United States is putting more restrictions on the type of information and data related to advanced technologies that can be legally shared with individuals and organizations in China. Under the new rules, even carrying a laptop to China with certain chip designs on it, or giving a Chinese national a tour of an advanced U.S. chip lab, can violate the law.The House committee has requested that the university provide extensive documents and information by July 27 about the partnership, including its funding, structure and technological work, its alumni’s current and past affiliations, and its compliance with U.S. export controls. More

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    China’s Second-Quarter G.D.P. Shows Post-Covid Rebound Faltered

    The NewsChina’s economy slowed markedly in the spring from earlier in the year, official numbers released on Monday showed, as exports tumbled, a real estate slump deepened and some debt-ridden local governments had to cut spending after running low on money.The new gross domestic product data for the second quarter — from April through June — underlined what has been apparent for weeks: China’s recovery after abandoning its extensive “zero Covid” measures will be harder to achieve than Beijing and many analysts had hoped.The NumbersCovid not only still hangs over China’s economy; it also skews some of its official data. The main G.D.P. number reported by Beijing on Monday, comparing this year with the same quarter last year, showed that the economy expanded 6.3 percent. But that reflected improvement from a sharp slowdown in 2022’s second quarter, a period when China’s largest city, Shanghai, was in a two-month lockdown. More

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    America’s Foreign Vacations Tell Us Something About the U.S. Economy

    Prices are high, but Americans are opening their wallets for international flights and hotels. It’s the latest evidence of consumer resilience.Forget Emily. These days, a whole flood of Americans are in Paris.People spent 2020 and 2021 either cooped up at home or traveling sparingly and mostly within the continental U.S. But after Covid travel restrictions were lifted for international trips last summer, Americans are again headed overseas.While domestic leisure travel shows signs of calming — people are still vacationing in big numbers, but prices for hotels and flights are moderating as demand proves strong but not insatiable — foreign trips are snapping back with a vengeance. Americans are boarding planes and cruise ships to flock to Europe in particular, based on early data.According to estimates from AAA, international travel bookings for 2023 were up 40 percent from 2022 through May. That is still down about 2 percent from 2019, but it’s a hefty surge at a time when some travelers are being held back by long passport processing delays amid record-high applications. Tour and cruise bookings are expected to eclipse prepandemic highs, with especially strong demand for vacations to major European cities.Paris, for example, experienced a huge jump in North American tourists last year compared with 2021, according to the city’s tourism bureau. Planned air arrivals for July and August of this year climbed by another 14.4 percent — to nearly 5 percent above the 2019 level.“This year is just completely crazy,” said Steeve Calvo, a Parisian tour guide and sommelier whose company — The Americans in Paris — has been churning out visits to Normandy and French wine regions. He attributes some of the jump to a rebound from the pandemic and some to television shows and social media.“‘Emily in Paris’: I never saw so many people in Paris with red berets,” he said, noting that the signature chapeau of the popular Netflix show’s heroine started to pop up on tourists last year. Other newcomers are eager to take coveted photos for their Instagram pages.“In Versailles, the Hall of Mirrors, I call it the Hall of Selfie,” Mr. Calvo said, referring to a famous room in the palace.Robust travel booking numbers and anecdotes from tour guides align with what companies say they are experiencing: From airlines to American Express, corporate executives are reporting a lasting demand for flights and vacations.“The constructive industry backdrop is unlike anything that any of us have ever seen,” Ed Bastian, the chief executive officer at Delta Air Lines, said during a June 27 investor day. “Travel is going gangbusters, but it’s going to continue to go gangbusters because we still have an enormous amount of demand waiting.”Transportation Security Administration data shows that the daily average number of passengers who passed through U.S. airport checkpoints in June 2023 was 2.6 million, 0.5 percent above the June 2019 level, based on an analysis by Omair Sharif at Inflation Insights.And in many foreign airports, the burst of American vacationers is palpable: Customs lines are packed with U.S. tourists, from Paris’s Charles de Gaulle to London’s Heathrow. The latter saw 8 percent more traffic from North America in June 2023 than in June 2019, based on airport data.“This year is just completely crazy,” said Steeve Calvo, a tour guide in Paris.Jessica Chou for The New York Times In a weird way, the rebound in foreign travel may be taking some pressure off U.S. inflation.International flight prices, while surging for some routes, are not a big part of the U.S. Consumer Price Index, which is dominated by domestic flight prices. In fact, airfares in the inflation measure dropped sharply in June from the previous month and are down nearly 19 percent from a year ago.That is partly because fuel is cheaper and partly because airlines are getting more planes into the sky. Many pilots and air traffic controllers had been laid off or had retired, so companies struggled to keep up when demand started to recover after the initial pandemic slump, pushing prices sharply higher in 2022.“We just didn’t have enough seats to go around last year,” Mr. Sharif said, explaining that while personnel issues persist, so far this year the supply situation has been better. “Planes are still totally packed, but there are more planes.”And as people flock abroad, it is sapping some demand from hotels and tourist attractions in the United States. International tourists have yet to return to the United States in full force, so they are not entirely offsetting the wave of Americans headed overseas.Domestic travel is hardly in a free fall — July 4 weekend travel probably set new records, per AAA — but tourists are no longer so insatiable that hotels can keep raising room rates indefinitely. Prices for lodging away from home in the U.S. climbed by 4.5 percent in the year through June, which is far slower than the 25 percent annual increases hotel rooms were posting last spring. There is even elbow room at Disney World.Even if it isn’t inflationary, the jump in foreign travel does highlight something about the U.S. economy: It’s hard to keep U.S. consumers down, especially affluent ones.The Fed has been raising interest rates to cool growth since early 2022. Officials have made it more expensive to borrow money in hopes of creating a ripple effect that would cut into demand and force companies to stop lifting prices so much.Consumption has slowed amid that onslaught, but it hasn’t tanked. Fed officials have taken note, remarking at their last meeting that consumption had been “stronger than expected,” minutes showed.The resilience comes as many households remain in solid financial shape. People who travel internationally skew wealthier, and many are benefiting from a rising stock market and still-high home prices that are beginning to prove surprisingly immune to interest rate moves.Those who do not have big stock or real estate holdings are experiencing a strong job market, and some are still holding onto extra savings built up during the pandemic. And it is not just vacation destinations feeling the momentum: Consumers are still spending on a range of other services.“There’s this last blowoff of spending,” said Kathy Bostjancic, chief economist for the insurance company Nationwide Mutual.It could be that consumer resilience will help the U.S. economy avoid a recession as the Fed fights inflation. As has been the case at American hotels, demand that stabilizes without plummeting could allow for a slow and steady moderation of price increases.But if consumers remain so ravenous that companies find they can still charge more, it could prolong inflation. That’s why the Fed is keeping a close eye on spending.Ms. Bostjancic thinks consumers will pull back starting this fall. They are drawing down their savings, the labor market is cooling, and it may simply take time for the Fed’s rate increases to have their full effect. But when it comes to many types of travel, there is no end in sight yet.“Despite economic headwinds, we’re seeing very strong demand for summer leisure travel,” said Mike Daher, who leads the U.S. Transportation, Hospitality & Services practice at the consulting firm Deloitte.Mr. Daher attributes that to three driving forces. People missed trips. Social media is luring many to new places. And the advent of remote work is allowing professionals — “what we call the laptop luggers,” per Mr. Daher — to stretch out vacations by working a few days from the beach or the mountains. Mr. Calvo, the tour guide, is riding the wave, taking Americans on tours that showcase Paris’s shared history with France and driving them in minivan tours to Champagne. “I have no clue if it’s going to last,” he said. More

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    JPMorgan, Citigroup and Wells Fargo Report Better-than-Expected Profits

    The NewsThree of the biggest banks in the United States made a cumulative $22.3 billion in profit last quarter, a hefty jump from the same period last year, the lenders reported Friday.The largest bank in the nation, JPMorgan Chase, led the way with $14.5 billion in profit, helped by growth virtually across the board, including increases in lending and credit-card transactions. Wells Fargo pulled in $4.9 billion and Citi earned $2.9 billion in the quarter. All of the earnings were higher than analysts had expected.JPMorgan Chase’s headquarters in New York. The bank made $14.5 billion in profit last quarter.Haruka Sakaguchi for The New York TimesWhy It MattersGiven its size, JPMorgan in particular is a proxy for the banking industry. Jamie Dimon, the bank’s chief executive, has deep political connections, and his prognostications on the economy are scrutinized in some circles as closely as a central banker’s musings.On Friday, Mr. Dimon told analysts that he expected the U.S. economy to experience “a soft landing, mild recession or a hard recession,” though he didn’t put a time frame on the prediction. “Obviously, we shall hope for the best,” he said.In its latest report, the bank listed a litany of risks, including that consumers are burning through their cash buffers and that inflation remains high. Last quarter, JPMorgan lost $900 million on investments in U.S. Treasury bonds and mortgage-backed securities, which have dropped in value as rates have risen — but that was barely a dent in its results.Wells Fargo, one of the nation’s largest mortgage lenders, is watched by analysts for signs of economic stress. The U.S. economy “continues to perform better than many had expected,” said Charles W. Scharf, the bank’s chief executive.The bank said Friday that soured loans in its commercial business had increased, but that its consumer business had held fairly steady, with a slight rise in credit-card defaults offset by a drop in losses on auto loans. Commercial real estate, especially loans on office space, is a pain point, and the bank set aside nearly $1 billion more for losses.Unlike the other banks, Citigroup reported a fall in second-quarter profit, although the decline was not as severe as analysts had predicted. “The long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter,” Citi’s chief executive, Jane Fraser, said in a statement.BackgroundThe three major banks that reported earnings Friday have been all over the news this year, thanks to their prominent role attempting to be a stabilizing force during the spring banking crisis that felled three smaller lenders. JPMorgan bought one of those failed banks, First Republic. In an indication of how troubled that institution had become, JPMorgan said Friday that it was setting aside $1.2 billion to deal with losses in First Republic’s lending portfolio.Analysts still expect the acquisition to prove worthy in the end, thanks to First Republic’s base of wealthy clients and coastal branches, which Friday’s results show are already buoying JPMorgan’s asset and wealth management arms.The U.S. government debt-limit standoff in April and May was also reflected in the banks’ results, with Citi citing anxiety during the negotiations as pushing investment-banking clients to the “sidelines” during the second quarter.What’s NextIn the next week or so, a slew of other banks will report quarterly earnings. Among the most closely watched will be Wednesday’s results from Goldman Sachs, which has hinted publicly of a disappointing stretch, and regional banks like Western Alliance and Comerica, which will be looking to prove they have bounced back from their recent troubles. More

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    For Many Small-Business Owners, a Necessary Shift to Digital Payments

    The pandemic accelerated a transition to cashless payments, forcing a reckoning among small-business owners. But there are benefits: One owner said the switch saved her $3,000 a month.“Making It Work” is a series about small-business owners striving to endure hard times.When Egypt Otis opened her business, Comma Bookstore and Social Hub, three years ago in Flint, Mich., the pandemic was full blown. But her neighbors welcomed the literature and art she sold in her store that celebrated people of color, as well as the community programs she hosted.Despite the warm reception, Ms. Otis quickly found that she had a sales problem: Her customers wanted to pay with their cellphones.“I realized that people were hardly keeping a wallet or a physical card, which limited my ability to sell and make money,” Ms. Otis said. So she upgraded her transactions platform to include tap-and-go purchases on mobile devices. “People are not carrying cash,” she said. “It’s becoming obsolete.”The number of Americans who say they are “cashless” has jumped in the last five years. Forty-one percent of Americans said they did not use cash for their purchases in a typical week in 2022, up from 29 percent in 2018, according to a Pew Research Center survey released last October.Small-business owners increasingly are making the switch to cashless payments for several reasons, including rising consumer demand, faster checkout, lower labor costs and increased security. Those who wait risk losing revenue, experts say.But there are drawbacks to going cash-free, including a learning curve for entrepreneurs who may not understand how to set up digital payments, a lack of accessibility to credit cards for low-income consumers, and privacy concerns.Signs at a pizza joint in New York indicating it takes multiple forms of cashless payments, a switch that accelerated in the pandemic.Karsten Moran for The New York TimesJuanny Romero was an early adopter of digital payments for her small business. Fifteen years ago, when she founded Mothership Coffee Roasters, a chain of coffee shops in Las Vegas, she began using Square, a low-cost digital payments system for small businesses.“​​I was a young businesswoman and not astute,” she said. But Square saved her $3,000 a month in merchant fees for credit card processing.As Ms. Romero expanded her businesses (to four locations in Las Vegas, with two more on the way), she added more payment options, including Apple Pay and Google Pay.But she noticed a shift during the pandemic: Her customers no longer wanted to use cash, and her employees did not want to handle it. “We didn’t know where Covid was coming from,” she said. “There were still people bringing in cash, but it was scary and dangerous.”When the coin shortage hit in 2020, she ran out of cash altogether, but Ms. Romero found it saved on labor costs. “My managers were standing in line for two hours to deposit the cash,” she said. “I can’t get an armored car service to pick up $100 in cash.”Even so, customer demand prompted her to return to cash sales, which Ms. Romero said are holding steady at about 11 percent of her overall revenue. She said she would go cashless if the share dipped below 10 percent.A digital transaction at Mothership Coffee Roasters in Las Vegas.Bridget Bennett for The New York TimesThe pressure to adapt is growing. More that 2.8 billion mobile wallets were in use at the end of 2020, and that is projected to increase nearly 74 percent to 4.8 billion — nearly 60 percent of the world’s population — by the end of 2025, according to a study released in 2021 by Boku, a fintech companyThe United States lags other countries in adopting cashless payments. Among the most cashless countries in the world is Britain, where the pound makes up only 1 percent of all transactions, according to a report from Merchant Machine, a payment research firm based in London. But in the United States, some small-business owners do not understand the complexities of digital payments.“Smaller merchants, they don’t always have the knowledge and resources to know what to do,” said Ginger Siegel, who leads the North America small-business segment at Mastercard, which offers training to business owners like Ms. Otis of Comma Bookstore.Ms. Otis said she noticed an increase in sales when she began offering mobile payments, which made the checkout process faster. “As a retailer, you want to make the experience as efficient as possible,” she said. “It is a matter of survival.”A veteran using a tap-and-go device to collect donations for the Royal British Legion in London in 2020.Guy Bell/AlamyBenefits include immediate payment, increased sales and the ability to sell to customers who might use other currencies. “You have to set it up, but it’s worth it,” said Kimberley A. Eddleston, a professor of entrepreneurship at Northeastern University.But some business owners say they are hesitant to move too quickly, worried that today’s technology could become obsolete tomorrow. And there are compatibility and cost issues to consider, said Wayne Read, the chief executive of Forged & Formed, an online jeweler with a physical store, Studio D Jewelers, in Woodstock, Ill. In his jewelry sales, where items can be pricey, he said a speedy transaction might not be suitable. “We don’t want people to feel they have rushed their decision,” he said.Despite advances in technology, many Americans still have little or no access to financial services like credit cards and mobile wallets, although that is slowly improving. An estimated 5.9 million households did not have a bank account in 2021, down from 7.1 million households in 2019, according to a survey by the Federal Reserve.Rewards points displayed on a checkout screen at Mothership. Mobile apps allow for cashless payments and can increase customer loyalty.Bridget Bennett for The New York TimesAnother obstacle to adoption is privacy concerns: Some people prefer the anonymity that cash provides. And cash is perceived as a way for consumers to remain aware of expenditures. Complicating the transition to the digital economy, the recent banking turmoil in the United States has made many depositors question the security of financial institutions.But experts agree that cash is unlikely to go away. Consumers in lower income households continue to rely on cash for payments, according to the Fed survey.And small-business owners say that despite the speed and efficiency that cashless payments offer, cash is still a viable option for their customers.“At the end of the day, I know the people I serve,” Ms. Romero said. “I would feel conflicted if I didn’t do the right thing.” More

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    in Economy

    June wholesale prices rise less than expected in another encouraging inflation report

    A customer shops in a Kroger grocery store on July 15, 2022 in Houston, Texas. 
    Brandon Bell | Getty Images

    The producer price index for June had a smaller than expected increase, the Labor Department reported Thursday, in the latest sign that inflation is calming in the United States.
    The PPI for final demand rose 0.1%. Economists surveyed by Dow Jones were expecting a rise of 0.2%. PPI rose 0.1% when excluding food, energy and trade services, which was in line with expectations.

    The producer report comes a day after the consumer price index showed a smaller-than-expected increase. The CPI rose just 3% year over year, its lowest since March 2021, bolstering hopes for investors that the Federal Reserve is near the end of its rate-hiking cycle.
    The wholesale producer numbers have declined faster than the consumer inflation data. In May, the headline PPI number actually declined 0.4%, and was unchanged when excluding food, energy and trade services. More