Evelyn Reynolds

Private payrolls increased by 164,000 for the month, higher than the 101,000 in November and better than the 130,000 estimate.
A rebound in leisure and hospitality led the way, as the sector added 59,000.
The pace of earnings growth decelerated again, with those staying in their job seeing annual pay increases of 5.4%.

A worker at a restaurant at Grand Central Market in Los Angeles, California, US, on Thursday, Nov. 2, 2023. 
Eric Thayer | Bloomberg | Getty Images

Hiring in the private sector rose at a faster than expected pace in December, closing out a strong 2023 for the resilient U.S. jobs market, ADP reported Thursday.
Private payrolls increased by 164,000 for the month, a substantial increase from the downwardly revised 101,000 in November and better than the 130,000 estimate from the Dow Jones consensus, according to the payrolls processing firm.

A rebound in leisure and hospitality led the way, as the sector added 59,000. Hotels, restaurants, bars and similar establishments had led the way in job creation after getting eviscerated in the early days of the Covid pandemic, but job creation in the industry tailed off in recent months. The sector also led in wage gains, with annual growth of 6.4%.
Construction contributed 24,000 to the total, while the other services category, which includes dry cleaning and other support businesses, added 22,000. Financial activities increased 18,000.
There were only a few categories down on the month, with manufacturing off 13,000 and information services and natural resources and mining both seeing a decline of 2,000.
The pace of earnings growth decelerated again, with those staying in their job seeing annual pay increases of 5.4% while job changers saw earnings increase 8%, ADP said.
“We’re returning to a labor market that’s very much aligned with pre-pandemic hiring,” ADP chief economist Nela Richardson said. “While wages didn’t drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared.”

From a size perspective, companies with fewer than 50 employees led with 74,000 new jobs. Geographically, the West saw an increase of 109,000 while the Northeast added 94,000.
The ADP release comes a day ahead of the Labor Department’s more closely watched nonfarm payrolls count, and the two reports can differ substantially due to differences in methodology. Economists surveyed by Dow Jones expect December nonfarm payroll growth of 170,000, after November’s 199,000, which was nearly double the ADP estimate.
Federal Reserve officials are watching the jobs reports closely for clues on the labor market and its impact on inflation. According to minutes released Wednesday from the December meeting of the Federal Open Market Committee, the central bank’s rate-setting panel, officials see the labor market coming better into balance from the huge supply-demand mismatch over the past few years. More

The Biden administration said its second grant under a new program would help Microchip Technology expand its facilities in Oregon and Colorado.The Biden administration on Thursday announced plans to provide $162 million in federal grants to Microchip Technology, an Arizona-based semiconductor company that supplies the automotive, defense and other industries.The agreement is the second award announced under a new program intended to help ensure that American companies that rely on semiconductors have a stable supply. Last month, the Biden administration announced a $35 million grant for BAE Systems, a defense contractor.The investment will enable Microchip to increase its production of semiconductors that are used in cars, airplanes, appliances, medical devices and military products. The administration said it expected the award to create more than 700 jobs in construction and manufacturing.“Today’s announcement with Microchip is a meaningful step in our efforts to bolster the supply chain for legacy semiconductors that are in everything from cars to washing machines to missiles,” Commerce Secretary Gina M. Raimondo said in a statement.Microchip plans to use $90 million to modernize and expand a facility in Colorado Springs and $72 million to expand a facility in Gresham, Ore. The administration said the funding would help Microchip triple its output at the two sites and decrease the company’s reliance on foreign facilities to help make its products.The company’s chips aren’t cutting-edge but are key components of nearly every military and space program. Microchip is one of the largest suppliers of semiconductors to the defense industrial base and a designated trusted foundry for the military. It also plays a crucial role in industries that are important for the national economy, U.S. officials said.That role became more obvious during the pandemic, when a global chip shortage cast a spotlight on domestic suppliers like Microchip. With foreign chip factories shut down to help contain the virus, automakers and other companies scrambled to secure supplies. As a result, demand for Microchip’s products surged.Those shortages also helped motivate lawmakers to pull together a funding bill aimed at shoring up American manufacturing and reduce reliance on foreign chips. The 2022 CHIPS and Science Act gave the Commerce Department $53 billion to invest in the semiconductor industry, including $39 billion for federal grants to encourage chip companies to set up U.S. facilities.The Commerce Department is expected to begin announcing larger awards in the coming months for major chip fabrication facilities owned by companies like Intel and Taiwan Semiconductor Manufacturing Company, known as TSMC.Microchip previously announced plans to increase its capacity in both Oregon and Colorado, but the government funding would be used to expand those enhancements and bring more production back to the United States, officials said. According to its filings, Microchip relies on outside facilities to make a significant proportion of its products — roughly 63 percent of its net sales in 2023 — a relatively common practice in the industry.While attention has focused on ensuring that U.S. facilities can manufacture some of the world’s most advanced chips, there are growing concerns about Chinese investments in less advanced semiconductors, also known as legacy chips, which help power cars, computers, missiles and dishwashers.U.S. officials are questioning whether such investments could increase the United States’ reliance on China or allow Chinese firms to undercut competitors. The Commerce Department has said it plans to begin a survey this month to identify how U.S. companies are getting their legacy chips and reduce security risks linked to China.The deal announced Thursday is a nonbinding preliminary agreement. The Commerce Department will carry out due diligence on the project before reaching the award’s final terms.The department said it had received more than 570 statements of interest and more than 170 pre-applications, full applications and concept plans from companies and organizations interested in the funding.Don Clark More

Automakers sold more cars in 2023 than a year ago as supply chain chaos ended, but sales are now under pressure from higher interest rates.After enjoying a strong rebound in sales in 2023, the auto industry appears headed for slower growth this year as consumers struggle with elevated interest rates and high prices for new cars and light trucks.Edmunds, a market researcher, expects the industry to sell 15.7 million vehicles this year. That would amount to a modest increase from the 15.5 million sold last year, when sales jumped 12 percent.“There’s definitely pent-up demand out there, because people have been holding off purchases for a while,” said Jessica Caldwell, head of insights at Edmunds. “But given the credit situation, we don’t think the industry will see a ton of growth this year.”Since the coronavirus pandemic, automakers have struggled with shortages of critical parts that have prevented them from producing as many vehicles as consumers wanted to buy. In 2023, the shortages, especially for computer chips, finally eased, allowing production to return to more normal levels.But over the past year, the Federal Reserve has significantly raised interest rates, which has pushed up costs considerably for car buyers.For years, many people took advantage of zero-percent loans to buy vehicles, even as prices climbed. But such deals, offered by automakers to move inventory, have nearly disappeared in the wake of the Fed’s rate hikes. In the fourth quarter of 2023, new-vehicle sales with zero-percent financing accounted for just 2.3 percent of all sales, according to Edmunds.Monthly payments are at near-record highs. In the fourth quarter, the average monthly payment on new cars was $739, up from $717 in the same period a year ago.Several automakers were hoping that a rapid rise in sales of new electric vehicles would drive the industry to gains into 2024 and 2025, but those cars and trucks haven’t taken off quite as quickly as many analysts and executives had hoped.In 2023, sales of battery-powered models in the United States topped one million vehicles for the first time, and Cox Automotive, another research firm, expects sales to reach 1.5 million this year. But General Motors, Ford Motor, Volkswagen and other manufacturers had been expecting an even faster ramp-up.But consumers have balked at the high prices of many of the newest electric models. Many drivers are also reluctant to make the switch to battery power, because they are not sure they will be able to find enough places to quickly refuel. That has forced automakers to reset their plans.G.M. had once forecast it would produce 400,000 electric vehicles by the middle of 2024 but now has given up that target, and it has delayed the production of some electric models.Ford had been aiming to have enough factory capacity by the end of 2024 to make 600,000 battery-powered vehicles a year, but it recently lowered production plans for its electric F-150 Lightning and its electric sport-utility vehicle, the Mustang Mach-E.On Wednesday, G.M. said that its sales of new vehicles in the United States jumped 14 percent last year. The company sold 2.6 million cars and light trucks in 2023, up from 2.3 million in 2022, when the chip shortage limited production.G.M. sold about 76,000 electric vehicles, up from 39,000 in 2022. But most were Chevrolet Bolts, a model that the company recently stopped making. Only about 13,000 were vehicle based on newer battery technology that G.M. had been hoping would make its electric vehicles affordable to many more car buyers.Sales for G.M. in the fourth quarter were relatively weak. They climbed just 0.3 percent from the same period a year earlier and were down 7 percent compared with the third quarter of 2023. The company said the sales of several important models were limited by a strike at some of its plants by the United Automobile Workers union.Separately, Toyota Motor, the second largest seller of cars in the United States after G.M., said its 2023 sales rose 7 percent, to 2.2 million vehicles. The company’s sales in the fourth quarter were 15.4 percent higher than in the same quarter a year ago and about 5 percent higher than in the third quarter.Stellantis, the maker of Chrysler, Ram and Jeep vehicles, said that it sold 1.5 million cars and trucks in 2023, about 1 percent less than the year before. The company plans to introduce eight new electric vehicles this year, and it aims to have battery-powered models account for half of its North American sales by the end of the decade.Honda, Hyundai and Kia also on Wednesday reported strong U.S. sales for 2023 And on Tuesday, Tesla, which dominates the electric car business in the United States, said it sold 1.8 million cars worldwide last year, up 38 percent from 2022.Ford is expected to report its sales total on Thursday. More

The Job Openings and Labor Turnover Survey showed employment listings nudged lower to 8.79 million, about in line with the Dow Jones estimate for 8.8 million and the lowest level since March 2021.
The ratio of job openings to available workers fell to 1.4 to 1, still elevated but down sharply from the 2 to 1 level that had been prevalent in 2022.
Also, the ISM manufacturing report for December registered a reading of 47.4, slightly better than expectations but still in contraction.

A job seeker visits a Job News USA career fair in Louisville, Kentucky, on June 23, 2021. A new Kentucky law cuts the maximum duration of unemployment benefits by more than half, to 12 weeks, during periods of low unemployment.
Luke Sharrett | Bloomberg | Getty Images

Demand for workers fell to its lowest level in more than 2½ years in November while hirings and layoffs both moved lower, the Labor Department reported Wednesday.
The department’s Job Openings and Labor Turnover Survey showed employment listings nudged lower to 8.79 million, about in line with the Dow Jones estimate for 8.8 million and the lowest since March 2021. Openings fell by 62,000, though the rate of vacancies as a measure of employment was unchanged at 5.3%.

In addition to the modest move lower in openings, hiring fell by 363,000, moving the rate down to 3.5%, a 0.2 percentage point decline. Layoffs dropped by 116,000, with the rate holding steady at 1%. A report last month from the Labor Department showed a net increase in nonfarm payrolls of 199,000 in November. A report Friday is expected to show growth of 170,000.
The ratio of job openings to available workers fell to 1.4 to 1, still elevated but down sharply from the 2 to 1 level that had been prevalent in 2022. Companies had faced a severe supply-demand mismatch in the period after the Covid pandemic began, a situation that has made gradual progress back to a more normalized state.
Job openings fell by 128,000 for transportation, warehousing and utilities and were off 97,000 in leisure and hospitality. Wholesale trade saw an increase of 63,000 and financial activities grew by 38,000.
Federal Reserve officials watch the JOLTS report for evidence of labor slack. The historically tight labor market had helped push inflation higher, hitting a more than 40-year peak in mid-2022 that also has slowly begun to recede. Policymakers in December indicated they are likely to begin a gradual reduction in interest rates this year if inflation continues to come down.
“Today’s JOLTS data is another signal that the Fed is delivering a soft landing,” said Ron Temple, chief market strategist at Lazard. “Today’s report is good news for American workers and the economy, but it also suggests to me that the Fed is unlikely to cut rates as aggressively in 2024, as markets currently indicate, given the risk of reigniting inflationary pressures.”

A separate report Wednesday showed that the U.S. manufacturing sector is still in contraction.
The ISM manufacturing report for December registered a reading of 47.4, representing the percentage of workers reporting expansion. Anything below 50 indicates contraction. The index was up 0.7 point from November and was slightly better than the 47.2 estimate from Dow Jones.
Employment, however, was a relative bright spot in the report, rising to 48.1, a 2.3-point monthly increase. Order backlogs jumped 6 points to 45.3 and new export orders rose to 49.9, a 3.9-point acceleration. There also was some positive inflation news as the prices sub-index decreased to 45.2, down 4.7 points.
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Central bankers wanted to signal that interest rates were likely at or near their peak while keeping their options open, December minutes showed.Federal Reserve officials wanted to use their final policy statement of 2023 to signal that interest rates might be at their peak even as they left the door open to future rate increases, minutes from their December meeting showed.The notes, released on Wednesday, explained why officials tweaked a key sentence in that statement — adding “any” to the phrase pledging that officials would work to gauge “the extent of any additional policy firming that may be appropriate.” The point was to relay the judgment that policy “was likely now at or near its peak” as inflation moderated and higher interest rates seemed to be working as planned.Federal Reserve officials left interest rates unchanged in their Dec. 13 policy decision and forecast that they would cut borrowing costs three times in 2024. Both the meeting itself — and the fresh minutes describing the Fed’s thinking — have suggested that the central bank is shifting toward the next phase in its fight against rapid inflation.“Several participants remarked that the Committee’s past policy actions were having their intended effect of helping to slow the growth of aggregate demand and cool labor market conditions,” the minutes said at another point. Given that, “they expected the Committee’s restrictive policy stance to continue to soften household and business spending, helping to promote further reductions in inflation over the next few years.”The Fed raised interest rates rapidly starting in March 2022, hoping to slow down economic growth by making it more expensive for households and businesses to borrow money. The economy has remained surprisingly resilient in the face of those moves, which pushed interest rates to their highest level in 22 years.But inflation has cooled sharply since mid-2023, with the Fed’s preferred measure of price increases climbing 2.6 percent in the year through November. While that is still faster than the central bank’s 2 percent inflation goal, it is much more moderate than the 2022 peak, which was higher than 7 percent. That has allowed the Fed to pivot away from rate increases.Officials had previously expected to make one final quarter-point move in 2023, which they ultimately skipped. Now, Wall Street is focused on when they will begin to cut interest rates, and how quickly they will bring them down. While rates are currently set to a range of 5.25 to 5.5 percent, investors are betting that they could fall to 3.75 to 4 percent by the end of 2024, based on the market pricing before the minutes were released. Many expect rate reductions to begin as soon as March.But Fed officials have suggested that they may need to keep interest rates at least high enough to weigh on growth for some time. Much of the recent progress has come as supply chain snarls have cleared up, but further slowing may require a pronounced economic cool-down.“Several participants assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress in reducing inflation may need to come mainly from further softening in product and labor demand, with restrictive monetary policy continuing to play a central role,” the minutes said.Other parts of the economy are showing signs of slowing. While growth and consumption have remained surprisingly solid, hiring has pulled back. Job openings fell in November to the lowest level since early 2021, data released Wednesday showed.Some Fed officials “remarked that their contacts reported larger applicant pools for vacancies, and some participants highlighted that the ratio of vacancies to unemployed workers had declined to a value only modestly above its level just before the pandemic,” the minutes noted.Fed officials also discussed their balance sheet of bond holdings, which they amassed during the pandemic and have been shrinking by allowing securities to expire without reinvesting them. Policymakers will need to stop shrinking their holdings at some point, and several officials “suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public.” More

One of the biggest economic surprises of 2023 was how quickly inflation faded. A dig into the details offers hints at whether it will last into 2024.Prices climbed rapidly in 2021 and 2022, straining American household budgets and chipping away at President Biden’s approval rating. But inflation cooled in late 2023, a spurt of progress that happened more quickly than economists had expected and that stoked hopes of a gentle economic landing.Now, the question is whether the good news can persist into 2024.As forecasters try to guess what will happen next, many are looking closely at where the recent slowdown has come from. The details suggest that a combination of weaker goods prices — things like apparel and used cars — and moderating costs for services including travel has helped to drive the cooldown, even as rent increases take time to fade.Taken together, the trends suggest that more disinflation could be in store, but they also hint that a few lingering risks loom. Below is a rundown of the big changes to watch.What we’re talking about when we talk about disinflation.What’s happening in America right now is what economists call “disinflation”: When you compare prices today with prices a year ago, the pace of increase has slowed notably. At their peak in the summer of 2022, consumer prices were increasing at a 9.1 percent yearly pace. As of November, it was just 3.1 percent.Still, disinflation does not mean that prices are falling outright. Price levels have generally not reversed the big run-up that happened just after the pandemic. That means things like rent, car repairs and groceries remain more expensive on paper than they were in 2019. (Wages have also been climbing, and have picked up more quickly than prices in recent months.) In short, prices are still climbing, just not as quickly.What inflation rate are officials aiming for?The Federal Reserve, which is responsible for trying to restore price stability, wants to return price increases to a slow and steady pace that is consistent with a sustainable economy over time. Like other central banks around the world, the Fed defines that as a 2 percent annual inflation rate. What caused the 2023 disinflation surprise?Inflation shocked economists in 2021 and 2022 by first shooting up sharply and then remaining elevated. But starting in mid-2023, it began to swing in the opposite direction, falling faster than widely predicted.As of the middle of last year, Fed officials expected a key measure of inflation — the Personal Consumption Expenditures measure — to end the year at 3.2 percent. As of the latest data released in November, it had instead faded to a more modest 2.6 percent. The more timely Consumer Price Index measure has also been coming down swiftly.The surprisingly quick cooldown started as travel prices began to decelerate, said Omair Sharif, founder of Inflation Insights. When it came to airfares in particular, the story was supply.Demand was still strong, but after years of limited capacity, available flights and seats had finally caught up. That combined with cheaper jet fuel to send fares lower. And while other travel-related service prices like hotel room rates jumped rapidly in 2022, they were increasing much more slowly by mid-2023.Travel inflation is returning to normalHotel price increases look much as they did before the pandemic, while airfares have recently fallen.

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Year-over-year percentage change in Consumer Price Index categories
Source: Bureau of Labor StatisticsBy The New York TimesThe next change that lowered inflation came from goods prices. After jumping for two years, prices for products like furniture, apparel and used cars began to climb much more slowly — or even to fall.The amount of disinflation coming from goods was surprising, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. And, encouragingly, “it was reasonably broad-based.”Used car deflation is backUsed vehicle prices fell in 2023. New car prices have been climbing, but more slowly than in 2022.

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Year-over-year percentage change in Consumer Price Index categories
Source: Bureau of Labor StatisticsBy The New York TimesThe inflation relief came partly from supply improvements. For years, snarled transit routes, expensive shipping fares and a limited supply of workers had limited how many products and services companies could offer. But by late last year, shipping routes were operating normally, pilots and flight crews were in the skies, and car companies were churning out new vehicles.“The supply side is at work,” said Skanda Amarnath, executive director at the worker-focused research group Employ America.What could be the next shoe to drop?In fact, one source of long-awaited disinflation has yet to show up fully: a slowdown in rental inflation.Private-sector data tracking new rents soared early in the pandemic but then slowed sharply. Many economists think that pullback will eventually feed into official inflation data as renters renew their leases or start new ones — but the process is taking time.Housing inflation remains faster than normalRent increases and a measure that approximates the cost of owned housing are both slowing only gradually.

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Year-over-year percentage change in Consumer Price Index categories
Source: Bureau of Labor StatisticsBy The New York Times“We’re likely to see more moderation in rent,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives. Because a bigger rent cooldown remains possible and goods price increases could keep slowing, many economists expect overall consumer price inflation to fall closer to the Fed’s goal by the end of 2024. There is even a risk that it could slip below 2 percent, some think.“It’s a scenario that deserves some discussion,” Ms. Rosner-Warburton said. “I don’t think it’s the most likely scenario, but the risks are more balanced.”What could go wrong?Of course, that does not mean Fed officials and the American economy are entirely out of the woods. Falling gas prices have been helping to pull inflation lower both overall and by feeding into other prices, like airfares. But fuel prices are notoriously fickle. If unrest in gas-producing regions causes energy costs to jump unexpectedly, stamping inflation out will become more difficult.Geopolitics also carry another inflation risk: Attacks against merchant ships in the Red Sea are messing with a key transit route for global commerce, for instance. If such problems last and worsen, they could eventually feed into higher prices for goods.And perhaps the most immediate risk is that the big inflation slowdown toward the end of 2023 could have been overstated. In recent years, end-of-year price figures have been revised up and January inflation data have come in on the warm side, partly because some companies raise prices at the beginning of the new year.“There is a bunch of choppiness coming,” Mr. Sharif said. He said he’ll closely watch a set of inflation recalculations slated for release on Feb. 9, which should give policymakers a clearer view of whether the recent slowdown has been as notable as it looks.But Mr. Sharif said the overall takeaway was that inflation looked poised to continue its moderation.That could help to pave the path for lower interest rates from the Fed, which has projected that it could lower borrowing costs several times in 2024 after raising them to the highest level in more than 22 years in a bid to cool the economy and wrestle inflation under control.“There’s not a lot of upside risk left, in my mind,” Mr. Sharif said. More

The Saudi fund boosted its deal activities from a total $20.7 billion in 2022 to $31.6 billion in 2023, the research said.
Notable overseas investments in 2023, alongside golf and soccer, included Nintendo in Japan and Vale Basic Materials in Brazil. 

Skyline of Riyadh in Saudi Arabia.
Simon Dawson | Bloomberg | Getty Images

Saudi Arabia’s Public Investment Fund (PIF) was the top spender among global sovereign wealth funds last year, accounting for about a quarter of the $124 billion splashed by state-owned investors, according to a preliminary report by research consultancy Global SWF.
The Saudi fund boosted its deal activities from a total $20.7 billion in 2022 to $31.6 billion in 2023, the research said, even as most other counterparts tapered down their spending. Overall, global sovereign wealth funds deployed 20% fewer funds compared to 2022, despite most major stock markets seeing a rally last year.

“This may signal an overly cautious approach, as there is no shortage of capital to put to work among these institutions,” the report, which tracks activities across the world’s sovereign funds, noted. 
“The clear winner was Saudi’s PIF, which has become a heavy-hitter both at home and overseas,” the analysts wrote. The PIF, controlled by Saudi Crown Prince Mohammed bin Salman, has total estimated assets of $776 billion. The Saudi fund has pursued frequent deals and joint ventures in its pursuit toward Vision 2030 — a plan originally launched back in 2016 which aims to increase economic diversification away from oil. Notable overseas investments in 2023, alongside golf and soccer, included Nintendo in Japan and Vale Basic Materials in Brazil. 

Asides from PIF, four other funds from the GCC (Gulf Corporation Council) made it into the top 10 — Mubadala, the Qatar Investment Authority, ADQ and the Abu Dhabi Investment Authority.
The PIF even surpassed Singapore’s GIC, which had led spending by wealth funds for the past six years. The Singaporean fund slashed its investment activity by 37%, in terms of volume, despite receiving one of its largest inflows from the central bank.
The report also noted the attention given to emerging markets among several sovereign investors. 

“In 2023 we can observe a renewed interest in emerging markets, including Saudi, Türkiye, and the UAE (with the help of domestic SWFs), and India, Brazil, China, and Indonesia,” it stated. 
Global economies will see more sovereign wealth funds coming online in 2024, such as Hong Kong’s HKIC, Philippines’ Maharlika and Pakistan’s PSWF.
“The formation of Dubai’s new SWF, DIF, will send shock waves and will surely attract personnel from other SWFs,” the research said. More

After years of strong consumer spending, some companies are now finding the limits of their pricing power.
Companies including FedEx, Target and General Mills have cut their sales outlooks, while airlines have slashed off-peak fares.
Faced with slipping demand, more price-sensitive consumers, easing inflation and better supply, some companies are looking for ways to grow profits without price hikes.

A FedEx worker delivers packages in New York, May 9, 2022.
Andrew Kelly | Reuters

After years of unbridled consumer spending on everything from home improvement to dream vacations, some companies are now finding the limits of their pricing power.
Shipping giant FedEx last week said customers have shied away from speedier, pricier shipping options. Airlines including Southwest discounted off-peak fares in the fall. The likes of Target and Cheerios maker General Mills have cut their sales outlooks as more consumers watch their budgets.

It’s a shift from the recent years when consumers spent at a breakneck pace — and at high prices — lifting corporate revenues to new records. But faced with weakening demand, more price-sensitive consumers, easing inflation and better supply, some sectors are now forced to find profit growth without the tailwind of price hikes.
The answer across industries has been to cut costs, whether it’s through layoffs or buyouts, or simply becoming more efficient. Executives have spent the past several weeks selling these cost-cutting plans to Wall Street.
Nike last week lowered its annual sales growth forecast and unveiled plans to cut costs by $2 billion over the next three years. Companies including Spirit Airlines, hit by a slowdown in domestic bookings and higher costs, offered salaried workers buyouts, while toymaker Hasbro announced layoffs of 1,100 employees as it struggles with lackluster toy sales.

Spirit Airlines jetliners on the tarmac at Fort Lauderdale Hollywood International Airport. (Joe Cavaretta/South Florida Sun Sentinel/Tribune News Service via Getty Images)
Joe Cavaretta | South Florida Sun-sentinel | Getty Images

“I think companies are better at controlling costs than maintaining pricing power,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.
“Goods companies don’t have the pricing power they did in the pandemic, and some in the hotel and travel [industries] — they don’t have the pricing power they did in the immediate post-Covid,” he added.

Sales growth for companies in the S&P 500 is on track to average 2.7% this year, according to mid-December analyst estimates posted by FactSet. That’s down from an average of 11% growth in 2022 over the year earlier. Meanwhile, net margins are forecast to fall only slightly year over year to 11.6% from 11.9%, FactSet said.
“Companies are extraordinarily committed to maintaining margins,” said Kelly.
FedEx, for example, despite its weaker sales forecast, maintained adjusted earnings outlook for its fiscal year that ends May 31. The company announced cost-cutting measures last year.

Sector shifts

Consumer spending has largely been resilient, but growth is slowing.
The Mastercard SpendingPulse survey showed holiday retail spending, which excludes auto sales and travel spending, rose 3.1% from Nov. 1 through Dec. 24 of this year over the same time frame in 2022, when consumers’ year-over-year retail spending increased 7.6%. Those figures are not adjusted for inflation.
The drag isn’t felt equally across industries.
According to the Mastercard survey, restaurant spending rose 7.8% during the holiday period, outpacing overall gains. Executives at Starbucks, for one, say sales are still strong and customers are opting for pricier drinks, fueling sales and profits.
Consumer spending on apparel and groceries rose 2.4% and 2.1%, respectively, from the year-earlier period, according to the survey. Spending on jewelry, however, fell 2.4% and spending on electronics dropped 0.4%, the report showed.
Airline executives have touted robust demand through the summer as travel rebounds from pandemic halts, but fares are dropping from 2022, when capacity was constrained by staffing shortages and aircraft delays. The latest inflation report from the U.S. Department of Labor showed airfare declined 12% in November from a year earlier.

Travelers walk with their luggage at John F. Kennedy International Airport in New York on Dec. 23, 2023.
Jeenah Moon | Getty Images

Southwest Airlines CEO Bob Jordan told CNBC on the sidelines of an industry event in New York earlier this month that the carrier’s fares are still up from last year, despite some discounting during off-peak travel times. The carrier has trimmed its capacity growth plans for 2024 and plans to utilize aircraft more during higher demand periods.
“The capacity changes next year are all about getting the network optimized to match the new demand patterns,” Jordan said. “In some cases, the peak and trough [of demand] are farther apart.”
Automakers are also losing their pricing power following years of resilient demand and low supplies of new vehicles that led to record North American profits for Detroit automakers as well as foreign-based companies such as Toyota Motor.
Average transaction prices of new vehicles climbed from less than $38,000 in January 2020 to more than $50,000 at the start of 2023 — an unprecedented 32% increase over that time. Prices remain elevated but were down more than 3.5% through October to roughly $47,936, according to the most recent data from Cox Automotive.
“The consumer is definitely pushing back,” said Ohsung Kwon, an equities strategist at Bank of America, referring to some prices.
“But we think the consumer is healthy,” he continued. “The balance sheet of the consumer still looks phenomenal.”

Spending hangover

There is plenty to cheer about the state of the U.S. consumer — the job market is still strong, unemployment is low and spending has been resilient.
But consumers have also tapped into their savings and racked up credit card debt, with balances reaching a record $1.08 trillion at the end of the third quarter, according to the New York Federal Reserve. Credit card delinquency rates are above pre-pandemic levels.
Those dynamics have some consumers pulling back on expenses at a time when companies had already been grappling with spending shifts as pandemic fears eased. Consumers that had spent heavily during Covid lockdowns on things such as home improvement supplies shifted their money to services such as travel and restaurants when restrictions lifted.
While airlines, many retailers and others have forecast a strong holiday season, the question remains whether consumers will continue their spending habits in the coming months, which are typically a low season for shopping and travel, especially as they pay off their recent purchases. That could mean a challenging period for companies to push price increases on consumers.
Even if companies can’t raise prices and if sales growth is muted, analysts are still upbeat about earnings next year.

FactSet data shows analysts expect a 6.6% increase in earnings of S&P 500 companies in the first quarter of 2024 from a year earlier. They forecast a sales increase of 4.4%. Both growth metrics would mark an annual improvement and quarter-on-quarter improvement. Net margins are expected to expand 11.8%.
Bank of America’s Kwon said he expects earnings to improve even if U.S. economic growth slows due in part to company strategy shifts.
“Companies are really focusing on what they can cut,” he said. “Companies have overhired and overbuilt capacity. They’ve stopped doing that.”
— CNBC’s Michael Wayland contributed to this article.Don’t miss these stories from CNBC PRO: More