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    IMF hikes global growth forecast as inflation cools and household spending surprises

    The International Monetary Fund said the global economy will grow 2.9% this year.
    This represents a 0.2 percentage point improvement from its previous forecast in October.
    However, it said that revised number would still mean a fall from an expansion of 3.4% in 2022.
    IMF calculations say that about 84% of nations will face lower headline inflation this year compared to 2022.

    The IMF has revised its global economic outlook upwards.
    Norberto Duarte | Afp | Getty Images

    The International Monetary Fund on Monday revised upward its global growth projections for the year, but warned that higher interest rates and Russia’s invasion of Ukraine would likely still weigh on activity.
    In its latest economic update, the IMF said the global economy will grow 2.9% this year — which represents a 0.2 percentage point improvement from its previous forecast in October. However, that number would still mean a fall from an expansion of 3.4% in 2022.

    It also revised its projection for 2024 down to 3.1%.
    “Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity,” Pierre-Olivier Gourinchas, director of the research department at the IMF, said in a blog post.

    The outlook turned more positive on the global economy due to better-than-expected domestic factors in several countries, such as the United States.
    “Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Gourinchas said, also noting that inflationary pressures have come down.
    In addition, China announced the reopening of its economy after strict Covid lockdowns, which is expected to contribute to higher global growth. A weaker U.S. dollar has also brightened the prospects for emerging market countries that hold debt in foreign currency.

    However, the picture isn’t totally positive. IMF Managing Director Kristalina Georgieva warned earlier this month that the economy was not as bad as some feared “but less bad doesn’t quite yet mean good.”
    “We have to be cautious,” Georgieva said during a CNBC-moderated panel at the World Economic Forum in Davos, Switzerland.
    The IMF on Monday warned of several factors that could deteriorate the outlook in the coming months. These included the fact that China’s Covid reopening could stall; inflation could remain high; Russia’s protracted invasion of Ukraine could shake energy and food costs even further; and markets could turn sour on worse-than-expected inflation prints.

    IMF calculations say that about 84% of nations will face lower headline inflation this year compared to 2022, but they still forecast an annual average rate of 6.6% in 2023 and of 4.3% the following year.
    As such, the Washington, D.C.-based institution said one of the main policy priorities is that central banks keep addressing the surge in consumer prices.
    “Clear central bank communication and appropriate reactions to shifts in the data will help keep inflation expectations anchored and lessen wage and price pressures,” the IMF said in its latest report.
    “Central banks’ balance sheets will need to be unwound carefully, amid market liquidity risks,” it added.

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    IMF Upgrades Global Economic Outlook as Inflation Eases

    The International Monetary Fund said the world economy was poised for a rebound as inflation eases.WASHINGTON — The International Monetary Fund said on Monday that it expected the global economy to slow this year as central banks continued to raise interest rates to tame inflation, but it also suggested that output would be more resilient than previously anticipated and that a global recession would probably be avoided.The I.M.F. upgraded its economic growth projections for 2023 and 2024 in its closely watched World Economic Outlook report, pointing to resilient consumers and the reopening of China’s economy as among the reasons for a more optimistic outlook.The fund warned, however, that the fight against inflation was not over and urged central banks to avoid the temptation to change course.“The fight against inflation is starting to pay off, but central banks must continue their efforts,” Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, said in an essay that accompanied the report.Global output is projected to slow to 2.9 percent in 2023, from 3.4 percent last year, before rebounding to 3.1 percent in 2024. Inflation is expected to decline to 6.6 percent this year from 8.8 percent in 2022 and then to fall to 4.3 percent next year.After a succession of downgrades in recent years as the pandemic worsened and Russia’s war in Ukraine intensified, the I.M.F.’s latest forecasts were rosier than those the fund released in October.Since then, China abruptly reversed its “zero Covid” policy of lockdowns to contain the pandemic and embarked on a rapid reopening. The I.M.F. also said that the energy crisis in Europe had been less severe than initially feared and that the weakening of the U.S. dollar was providing relief to emerging markets.The I.M.F. predicted previously that a third of the world economy could be in recession this year. However, Mr. Gourinchas said in a news briefing ahead of the release of the report that far fewer countries were now facing recessions in 2023 and that the I.M.F. was not forecasting a global recession.Lukoil oil field in the Baltic Sea. A coordinated plan by the United States and Europe to cap the price of Russian oil exports at $60 a barrel is not expected to substantially curtail its energy revenues.Vitaly Nevar/Reuters“We are seeing a much lower risk of recession, either globally, or even if we think about the number of countries that might be in recession,” Mr. Gourinchas said.Despite the more hopeful outlook, global growth remains weak by historical standards and the war in Ukraine continues to weigh on activity and sow uncertainty. The report also cautions that the global economy still faces considerable risks, warning that “severe health outcomes in China could hold back the recovery, Russia’s war in Ukraine could escalate and tighter global financing costs could worsen debt distress.”Growth in rich countries is expected to be particularly sluggish this year, with nine out of 10 advanced economies likely to have slower growth than they had in 2022.The I.M.F. projects growth in the United States to slow to 1.4 percent this year from 2 percent in 2022. It expects the jobless rate to rise from 3.5 percent to 5.2 percent next year, but that it is still possible that a recession can be avoided in the world’s largest economy.“There is a narrow path that allows the U.S. economy to escape a recession altogether, or if it has a recession, the recession would be relatively shallow,” Mr. Gourinchas said.The slowdown in Europe will be more pronounced, the I.M.F. said, as the boost from the reopening of its economies fades this year and consumer confidence frays in the face of double-digit inflation. In the euro area, growth is projected to slow to 0.7 percent from 3.5 percent.China is projected to pick up the slack with output accelerating to 5.2 percent in 2023 from 3 percent in 2022.Combined, China and India are expected to account for about half of global growth this year. I.M.F. officials said at a press briefing on Monday night that China’s economic trajectory would be a major driver for the world economy, noting that after a period of flux, China appears to have stabilized and is able to fully produce.However, Mr. Gourinchas noted that there were still signs of weakness in China’s property market and that its growth could moderate in 2024. The report described the sector as a “major source of vulnerability” that could lead to widespread defaults by developers and instability in the Chinese financial sector.A surprising contributor to global growth is Russia, suggesting that efforts by Western nations to cripple its economy appear to be faltering. The I.M.F. predicts Russian output to expand 0.3 percent this year and 2.1 percent next year, defying earlier forecasts of a steep contraction in 2023 amid a raft of Western sanctions.A coordinated plan by the United States and Europe to cap the price of Russian oil exports at $60 a barrel is not expected to substantially curtail the country’s energy revenues.“At the current oil price cap level of the Group of 7, Russian crude oil export volumes are not expected to be significantly affected, with Russian trade continuing to be redirected from sanctioning to non-sanctioning countries,” the I.M.F. said in the report.Among the I.M.F.’s most pressing concerns is the growing trend toward “fragmentation.” The war in Ukraine and the global response have divided nations into blocs and reinforced pockets of geopolitical tension, threatening to hamper economic progress.“Fragmentation could intensify — with more restrictions on cross-border movements of capital, workers and international payments — and could hamper multilateral cooperation on providing global public goods,” the I.M.F. said. “The costs of such fragmentation are especially high in the short term, as replacing disrupted cross-border flows takes time.” More

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    Wall St. Is Counting on a Debt Limit Trick That Could Entail Trouble

    If the debt limit is breached, investors expect Treasury to put bond payments first. It’d be politically and practically fraught.Washington’s debt limit drama has Wall Street betting that the United States will employ a fallback option to ensure it can make good on payments to its lenders even if Congress doesn’t raise the nation’s borrowing limit before America runs out of cash.But that untested idea has significant flaws and has been ruled out by the Biden administration, which could make it less of a bulwark against disaster than many investors and politicians are counting on.Many on Wall Street believe that the Treasury Department, in order to avoid defaulting on U.S. debt, would “prioritize” payments on its bonds if it could no longer borrow funds to cover all its expenses. They expect that America’s lenders — the bondholders who own U.S. Treasury debt — would be first in line to receive interest and other payments, even if it meant delaying other obligations like government salaries or retirement benefits.Those assumptions are rooted in history. Records from 2011 and 2013 — the last time the U.S. tipped dangerously close to a debt limit crisis — suggested that officials at the Treasury had laid at least some groundwork to pay investors first, and that policymakers at the Federal Reserve assumed that such an approach was likely. Some Republicans in the House and Senate have painted prioritization as a fallback option that could make failure to raise the borrowing cap less of a disaster, arguing that as long as bondholders get paid, the U.S. will not experience a true default.But the Biden administration is not doing prioritization planning this time around because officials don’t think it would prevent an economic crisis and are unsure whether such a plan is even feasible. The White House has not asked Treasury to prepare for a scenario in which it pays back investors first, according to multiple officials. Janet L. Yellen, the Treasury secretary, has said such an approach would not avoid a debt “default” in the eyes of markets.“Treasury systems have all been built to pay all of our bills when they’re due and on time, and not to prioritize one form of spending over another,” Ms. Yellen told reporters this month.Perhaps more worrisome is that, even if the White House ultimately succumbed to pressure to prioritize payments, experts from both political parties who have studied the temporary fix say it might not be enough to avert a financial catastrophe.Senator Ted Cruz, center, and other Republicans during a news conference on debt ceiling on Capitol Hill last week.Haiyun Jiang/The New York Times“Prioritization is really default by another name,” said Brian Riedl, formerly chief economist to former Republican Senator Rob Portman and now an economist at the Manhattan Institute. “It’s not defaulting on the government’s debt, but it’s defaulting on its obligations.”Congress must periodically raise the nation’s debt ceiling to authorize the Treasury to borrow to cover America’s commitments. Raising the limit does not entail any new spending — it is more like paying a credit-card bill for spending the nation has already incurred — and it is often completed without incident. But Republicans have occasionally attempted to attach future spending cuts or other legislative goals to debt limit increases, plunging the United States into partisan brinkmanship.Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More

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    Ford Follows Tesla in Cutting Electric Vehicle Prices

    The automaker reduced the price of the Mustang Mach-E by up to $5,900 after Tesla slashed prices of its cars by as much as 20 percent.Ford Motor said on Monday that it was cutting prices on its top-selling battery-powered model, the Mustang Mach-E, and increasing production of the sport utility vehicle. It was the latest sign of intensifying competition in the electric car market.Two weeks ago, Tesla slashed prices of its electric cars by as much as 20 percent in response to softening demand around the world.The price cuts for the two most affordable versions of the Mach-E amounted to less than $1,000 each. Other models, with longer-range batteries and premium options, were reduced $3,680 to $5,900, reductions of 6 percent to 9 percent.“We want to make E.V.s more accessible, so we’re increasing production and reducing prices across the Mach-E lineup,” Ford’s chief executive, Jim Farley, said on Twitter. He added that “with higher production, we’re reducing costs, which allows us to share these savings with customers.”The lowest-priced Mustang Mach-E — a rear-wheel-drive model with a standard battery — now has a list price of $45,995, a reduction of $900. The high-performance Mach-E GT with an extended-range battery now sells for $63,995, a cut of $5,900.Tesla’s least expensive car is the Model 3, which is smaller than the Mustang Mach-E and starts at $43,990. The all-wheel-drive Model Y, a more direct competitor of the electric Mustang, starts at $53,490. An all-wheel-drive Mustang Mach-E with comparable battery range now lists for $53,995.Electric vehicles priced below $55,000 can qualify for federal tax credits of $7,500 that were made available starting Jan. 1 under the Inflation Reduction Act. Ford’s price cuts will make more versions of the Mach-E eligible for the credit.Ford said the new prices would automatically apply to customers who had placed orders and were waiting for their cars. Ford’s credit division is also offering subsidized interest rates as low as 5.34 percent on Mach E orders placed between Jan. 30 and April 3.Tesla has long dominated the electric car market, which it largely had to itself until the last couple of years, but is increasingly encountering stiff competition. Its rate of growth has slowed in China, where its is now outsold by a local manufacturer, BYD. In addition to Ford, Volkswagen, Hyundai, Kia and other automakers have introduced electric models in the United States that are selling well and are generally cheaper than Tesla’s luxury models.In 2022, Ford sold just under 40,000 Mach-Es, about 45 percent more than in 2021. That made the Mach-E the third-best-selling electric model after Tesla’s Model Y and Model 3.For much of the last two years, Tesla, Ford and other automakers raised prices of electric vehicles because demand for battery-powered cars far outstripped supply. But demand for cars and other big-ticket goods has weakened in recent months as the Federal Reserve has raised interest rates significantly. Fed policymakers are expected to slow their rate increases at their first meeting of the year on Wednesday. More

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    Falling Used-Car Demand Puts Pressure on Carvana and Other Dealers

    Dealerships are seeing sales and prices drop as consumers tighten their belts, putting financial pressure on companies like Carvana that grew fast in recent years.About a year ago, the used-car business was a rollicking party. The coronavirus pandemic and a global semiconductor shortage forced automakers to stop or slow production of new cars and trucks, pushing consumers to used-car lots. Prices for pre-owned vehicles surged.Now, the used-car business is suffering a brutal hangover. Americans, especially people on tight budgets, are buying fewer cars as interest rates rise and fears of a recession grow. And improved auto production has eased the shortage of new vehicles.As a result, sales and prices of used cars are falling and the auto dealers that specialize in them are hurting.“After a huge run up in 2021, last year was a reality check,” Chris Frey, senior manager of economic and industry insights at Cox Automotive, a market research firm. “The used market now faces a challenging year as demand weakens.”According to Cox, used-car values fell 14 percent in 2022 and are expected to fall more than 4 percent this year. That shift means many dealers may have no choice but to sell some vehicles for less than they paid.The industry’s difficulties have been exemplified by Carvana, which sells cars online and became famous for building “vending machine” towers where cars can be picked up. The company recently reported a quarterly loss of more than $500 million, and has laid off 4,000 employees.In the last 12 months, Carvana piled up debt. Its stock price has fallen by more than 95 percent in the last 12 months, and three states temporarily suspended its operating license after consumer complaints.“We think there’s a decent chance the company will end up having to file for bankruptcy protection,” said Seth Basham, an Wedbush analyst. “They have too much debt for the level of sales and profitability and can’t support that debt load, and likely will need to restructure.”In a statement to The New York Times, Carvana said it was confident it had “sufficient” funds to turn its business around, noting the company had $2 billion in cash and an additional $2 billion in “other liquidity resources” at the end of the third quarter.It has also hired the investment bank Moelis & Company and is working to reduce its inventory of vehicles and cut the cost of reconditioning them.Used-car values fell 14 percent in 2022. Some dealers may have no choice but to sell some vehicles for less than they paid.An Rong Xu for The New York Times“Millions of satisfied customers have responded positively to Carvana’s e-commerce model for buying and selling cars,” the company said. “Although the current environment and market has drawn attention to the near term, we continued to gain market share in the third quarter of 2022, and we remain focused on our plan to drive to profitability.”CarMax, another used-car giant, is also hurting, although it is on much steadier ground. In the three months that ended in November, its vehicle sales fell 21 percent to 180,000, and net income tumbled 86 percent, to $37.6 million.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Smaller Rate Increase by Federal Reserve Likely as Inflation Cools

    America’s central bank is expected to raise rates by a quarter point on Wednesday. The question now is what comes next.Federal Reserve officials are widely expected to raise interest rates by a quarter point at their meeting this week, further slowing what had been an aggressive pace of rate increases in 2022 as they wait to see how swiftly inflation will fade.Moving gradually will give Fed officials more time to assess how high rates need to rise and how long they need to stay elevated to fully wrangle inflation, both of which are looming and crucial questions. The answers will help to determine how much damage the Fed inflicts on the labor market and broader economy in its quest to control price increases.Central bankers raised interest rates from near zero to above 4.25 percent last year, and they are expected to lift rates to a range of 4.5 to 4.75 percent on Wednesday. Investors will be even more attuned to what may come next, and will parse the Fed’s 2 p.m. statement and the subsequent news conference by the Fed chair Jerome H. Powell for clues about the future.Fed officials predicted in December that they would lift rates to just above 5 percent in 2023, then hold them at a high level throughout the year. But incoming data will drive how high the Fed raises rates and how long they keep them at that level.Since the Fed’s last decision, inflation has meaningfully slowed, and data on the economy show that consumers are becoming more cautious and beginning to spend less. Anecdotes suggest that shoppers may be more sensitive to prices, which would make it more difficult for companies to continue passing along big price increases. At the same time, the job market remains very strong, and economists and central bankers have warned that a re-acceleration in growth and inflation remains possible. That is likely to keep the Fed wary of prematurely declaring victory over inflation.“They’re going to stay vigilant on inflation — I don’t think they’re going to break out the ‘mission accomplished’ banner just yet,” said Gennadiy Goldberg, a rates strategist at T.D. Securities. “If they don’t send the signal that they really want to get inflation under control, the market could over-interpret that as a signal that they’re done. That’s not the message they want to send.”Wall Street will be focused on one word in particular in the Fed’s policy statement: “ongoing.” In recent months, central bankers have stated that “ongoing increases in the target range will be appropriate.”Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Netherlands and Japan Said to Join U.S. in Curbing China’s Access to Chip Tech

    A new agreement is expected to expand the reach of U.S. technology restrictions on China issued last year.WASHINGTON — The Netherlands and Japan, both makers of some of the world’s most advanced equipment for manufacturing semiconductors, agreed on Friday to join with the United States in barring some shipments of their most high-tech machinery to China, people familiar with the agreement said.The agreement, which followed high-level meetings with U.S. national security officials in Washington, will help expand the reach of sweeping restrictions issued unilaterally by the Biden administration in October on the kinds of semiconductor technology that can be shared with China.The countries did not publicly announce the agreement, because of its sensitivity, and details remain unclear. But the deal seems likely to put technology industries in the countries on a more even footing, preventing companies in Japan and the Netherlands from rushing in to claim market share in China that has been abandoned by U.S. firms. American companies have said that possibility would put them at a disadvantage.More on JapanMissing a Successor: An owner’s struggle to find someone to take over his thriving business illuminates the potentially devastating economic effects of an aging society.Tech Workers: Japanese companies are trying to lure highly educated Indians to fill a shortage of IT engineers. Can they make their country appealing to them?Hiroyuki Nishimura: This celebrity entrepreneur and author has become a voice for disenchanted young Japanese. What he talks about much less is his ownership of 4chan.A Policy Change: Japan’s central bank unexpectedly announced in December that it was adjusting its stance on bond purchases. This is why that matters.The White House and the Dutch government declined to comment. The Japanese government did not immediately respond to a request for comment.The United States imposed strict controls in October on the sale to China of both semiconductors and the machines used to make them, arguing that Beijing could use the technology for military purposes, like breaking American codes or guiding hypersonic missiles. But well before those restrictions were issued, the United States had been pressing the Netherlands and Japan to further limit the advanced technology they export to China.The October rules also clamped down on certain shipments to China from countries outside the United States. Using a novel regulation called the foreign direct product rule, the Biden administration barred companies that use American technology, software or inputs from selling certain advanced semiconductors to China. But these measures applied only to chips, not the machinery used to make them.Instead, the White House continued to press allies to pass restrictions limiting the sales of semiconductor manufacturing equipment by firms like the Dutch company ASML or Tokyo Electron in Japan. The White House argued that the sale of this advanced machinery to China created the danger that Beijing could one day make its own versions of the advanced products it could no longer buy from the United States.The negotiations, which are likely to continue, have had to overcome both commercial and logistical concerns. Like the Americans, the Dutch and Japanese were concerned that if they pulled out of the Chinese market, foreign competitors would take their place, said Emily Benson, a senior fellow at the Center for Strategic and International Relations, a Washington think tank. Over time, that “could impact their ability to maintain a technological edge over competitors,” she said.The Dutch government has already forbidden sales of its most advanced semiconductor machinery, called extreme ultraviolet lithography systems, to China. But the United States has encouraged the Dutch to also limit a slightly less advanced system, called deep ultraviolet lithography. The deal reached Friday includes at least some restrictions on that equipment, according to one person familiar with its terms.Governments have also faced questions about whether they possess the legal authority to issue restrictions like the United States, as well as extensive technical discussions about which technologies to restrict. Japan and the Netherlands will still likely require some time to make changes to their laws and regulations to put new restrictions in place, Ms. Benson added, and it could take months or years for restrictions in the three countries to mirror one another. More

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    When Private Equity Came for the Toddler Gyms

    Tiffany Cianci spends most of her days in socks, padding around the fitness studio she operates in Frederick, Md., about an hour outside Washington. Her clients are young: kids ranging from 4 months to 12 years old. They come to learn somersaults, try the monkey bars, sing some songs. (“Little Red Caboose,” complete with a train whistle accompaniment, is one of her favorites.)Ms. Cianci, 41, spent the first part of her career as a sommelier, specializing in sake. In 2017, wanting to leave the hospitality industry for something that allowed her to spend more time at home, she and her husband bought their facility as part of a franchise chain called The Little Gym. Its slogan: “Serious fun.”They got what generations of franchise owners have gotten out of similar deals, with brands like McDonald’s or Jiffy Lube: a known brand name and detailed business plans in exchange for an initial fee and a cut of the revenue. For Ms. Cianci, it was more than just a business.“I love it. I really love it,” said Ms. Cianci, a mother of three who studied dance. “I love my students, and I love that it lets me make a difference.”In the last year and a half, since The Little Gym was acquired by a private equity-backed firm called Unleashed Brands, her work has felt far less idyllic.According to legal filings, internal documents, and interviews with more than half a dozen other franchisees — most of whom requested anonymity so as to avoid retaliation — Unleashed began to demand higher fees and institute more stringent requirements, which the independent owners thought would threaten their profits. The day after Ms. Cianci organized her fellow franchise owners into an association to push back against the changes, the corporate office told her it was terminating her license on the grounds that she was chronically late in paying her fees. Given the timing, Ms. Cianci maintains in the legal filings that it constituted retaliation.Tiffany Cianci, the owner of Teeter Tots, is fighting a court battle against Unleashed Brands, which bought the company that originally franchised her business.Lexey Swall for The New York TimesAlong the way, Unleashed Brands surveilled Ms. Cianci’s business with undercover shoppers, met with her landlord and disparaged her to fellow franchisees. When she tried to salvage her business under a new name — it’s now called Teeter Tots Music n Motion — the company sued, accusing her of violating its trademarks and a noncompete clause in her franchise agreement.The episode has plunged Ms. Cianci about $300,000 into debt and enmeshed Unleashed in a nasty court battle not long after it acquired multiple new brands. The outcome will be a test of just how much a franchisor can unilaterally change the rules of a business relationship that has served as an on-ramp to entrepreneurship for hundreds of thousands of people.The legal fight — along with two others Unleashed has faced with franchisees at its other brands — also reveals the challenges of applying the private equity playbook to the unique world of franchises.Private equity has notched decades of high returns for investors by following a well-worn strategy: acquire distressed or undervalued companies or real estate, increase profits and then sell them. Greatest hits include foreclosed homes, highway rest stops and coal mines bought out of bankruptcy.Franchising has become one of private equity’s targets du jour. According to the research firm FRANdata, the number of franchise brands acquired by private equity firms and other investors rose from 52 in 2019 to 149 in 2021 and was on track to nearly equal that total in 2022.Private equity firms tout their ability to bring new ideas, technologies and efficiencies, and franchises, financially weakened by the pandemic, appeared ripe for those kinds of changes.But the reality is not so straightforward. The nation’s franchisees — 237,619, according to FRANdata — like Ms. Cianci, think of themselves as independent small businesses, who have often sunk their life savings into the enterprise. That’s why Little Gym owners are resisting Unleashed’s attempts to squeeze their profits to pad its own.Unlike, say, factory workers, who can be laid off at will, franchisees are supposed to be protected by legal documents that prescribe a certain business model for years at a time. Moreover, Unleashed — and its investors — need franchisees to stay motivated so they can keep generating revenue and recruit others to keep expanding the franchise system.Ms. Cianci, who is now in arbitration with Unleashed Brands, has been working to change state laws to better protect franchisees who might find themselves in her position down the line. The Federal Trade Commission, meanwhile, is reconsidering federal regulations on franchisors, which haven’t changed for more than a decade.Direct inquiries to Michael Browning Jr., Unleashed’s chief executive and founder, and other executives were not returned. Instead, a public relations firm answered detailed questions via email, saying the company’s changes have improved business across the board. “The financial impact and franchisee benefit of these efforts is undeniable,” the spokesman wrote.Many of the changes, however, are simply not what franchisees say they’d signed up for.“What this reflects is a conflict between the private equity firm that bought this and what they actually bought,” said Francine Lafontaine, an economist at the University of Michigan who specializes in franchise relationships. “In their due diligence, they didn’t seem to think too much about who they were going to be working with once they owned this chain.”‘Candy Land board of life’Ms. Cianci helps Mariah Strawley move her daughter, Brynlee Strawley, 19 months, through an obstacle course during a class.Lexey Swall for The New York TimesMr. Browning, the son of a real estate developer with a background in health care investing, viewed The Little Gym as a perfect part of his vision: He was building a conveyor belt of activities for kids.Mr. Browning spent the 2010s building a franchise called Urban Air, a chain of trampoline parks where parents could spend $700 on a birthday party to remember for their seventh grader. The venture was staked by Mr. Browning and his father and eventually Urban Air formed Unleashed.Private equity was also interested in the Brownings’ growing business. While a company spokesman did not clarify the company’s relationship with private equity, on the websites of the private equity firms AHR Growth Partners, Mantucket Capital and MPK Equity Partners, Unleashed or its brands are listed among their current or recent investments.In 2021, Mr. Browning decided to scale up, following a hot new trend in private equity: building “platforms” to consolidate several brands in a similar industry that could then cross-sell a range of services to their customers, as well as sell more franchises to their existing franchisees. Mr. Browning would often mention Neighborly, a roll-up of home services offerings that had been bought by the private equity giant KKR, as his model.“If I have five home services brands, I can pitch all those services to the same customer,” said Ritwik Donde, senior research analyst at FRANdata, which helps investors vet potential acquisitions. “Those complementary systems lower the cost of customer acquisition. ”Mr. Browning’s company, Unleashed Brands, began buying other youth enrichment chains. Parents — always moms, in Mr. Browning’s conception — could then spend money at his companies from the birth of their kids through high school graduation.Ms. Cianci was immediately skeptical of Mr. Browning’s vision for rapidly collecting children’s services and integrating their sales, operations and marketing.“That might be OK when you’re cleaning a dryer vent, but it’s not when you’re throwing around a 4-month-old and you need them to be safe,” Ms. Cianci said. “He was moving faster than he would need to get to know the business.”Ms. Cianci helped organize a group of Little Gym franchisees to contest some new requirements imposed by Unleashed Brands.Lexey Swall for The New York TimesTo kick off the new program, Unleashed invited all of its newly acquired franchisees to a conference in Orlando in October 2021, including Little Gym’s approximately 175 owners. The company rented out the Wizarding World of Harry Potter and held a fireworks show. And Mr. Browning treated attendees to a speech he called “vision casting,” in which he articulated his plans for building a family of children’s brands that families could spend money on from birth to age 18.The “Candy Land board of life,” he called it. He promised new tech tools that would make their lives easier. “Auto-magic,” he called it.Changes didn’t take long. Within weeks, long-tenured headquarters employees started leaving. In conversations with franchisees across the country, numerous owners expressed frustration that the support they depended on had evaporated; instead of calling a trusted adviser whenever they wanted, they had to file an online ticket. (Unleashed said that it “never sought to cut access” to its staff and that the ticket system was instituted to make sure they were responding in a timely fashion.)The company tried to impose a new payroll vendor that caused unending headaches. Certain activities, such as karate, were eliminated as Unleashed acquired businesses with similar programming; the company said it trimmed services with low enrollment to “streamline” the offerings. The company also outlined a process by which franchisees could lose their licenses if they failed to meet brand standards, which set a sour tone among some of the operators. To people who’d just made it through a pandemic and operated on thin margins even in good times, the changes felt unnecessary and destabilizing.In the fall of 2021, the company required all franchisees to sign a new agreement allowing Unleashed to automatically debit their bank accounts. Ms. Cianci noticed that it also contained broad language allowing the company to extract any other fees that might be owed, which she believed went beyond her franchise agreement.Under the advice of a lawyer, she refused to sign it and started to send her royalty payments via paper check. But she worried that most franchisees would simply accept the new arrangement, along with another requiring them to use — and pay for — a shared call center.To sound the alarm to others, Ms. Cianci held conference calls, often with a lawyer present. As concerns spread, in May a group of Little Gym franchisees formed the Happy Handstands Franchisee Association, which ultimately reached more than 90 percent participation from across the system. Ms. Cianci was elected president. The company started sending warning notices to franchisees who hadn’t signed the new agreements.On May 19, 2022, Happy Handstands’ lawyers sent Unleashed a cease-and-desist letter on behalf of the membership. The very next evening, an email popped up saying Ms. Cianci’s franchise had been terminated. When she tried to check it, her email account was gone, too. Unleashed said the company didn’t know she was the association’s president when they decided to terminate her. Ms. Cianci said it was widely known across the system and mentioned in a Facebook group visible to lower-level corporate executives.To save her business, Ms. Cianci went before an arbitrator and filed for a preliminary injunction decrying the termination as retaliatory; the arbitrator ruled that she hadn’t cleared the high legal bar necessary to stop the process. After that, she started tearing down all her Little Gym branding and adapting her curriculum so as not to violate the company’s trademarks. She paused when Unleashed’s lawyers wanted to discuss a settlement, which she said she rejected over its harsh terms. When they demanded she finish the process of “de-identifying” as a Little Gym immediately, she had difficulty getting started again because she had surgery on a broken foot.In June and July, the company sent undercover shoppers, including one who was a licensed private investigator, who posed as parents and asked Ms. Cianci’s employees what kinds of lessons they offered and whether they overlapped with The Little Gym’s programming. In early July, Unleashed, with the help of outside counsel DLA Piper, sued her in the superior court of Arizona for Maricopa County, where The Little Gym is based. The company accused her of failing to eliminate all branding fast enough, offering declarations from the investigators as evidence — the color scheme looked the same, for example, and a Wi-Fi network was still “TheLittleGym,” password “SeriousFun.”Soon after, the company’s lawyers also visited her landlord in Frederick, which Unleashed said was “part of a standard process to inquire as to the status of the lease.” According to Ms. Cianci’s notes from her subsequent conversation with the landlord, the lawyers told him that she was in legal trouble and wouldn’t be able to keep paying rent.Her landlord then sent her a letter, which was filed as evidence in court, declining to renew her lease and demanding more than $275,000 in back rent, including real estate taxes, most of which Ms. Cianci thought had been forgiven during the pandemic. Unleashed then exercised its option to take over the lease, although the building remains empty. (Her landlord declined to comment.)In mid-July, Unleashed Brands’ chief legal officer, Stephen Polozola, sent all Little Gym franchisees an email titled “Friendly Reminder on Confidentiality.” In it, without naming Ms. Cianci, he warned them not to share any information with a certain former franchisee, who he said had been terminated for not paying royalty fees on time.Further, he wrote that the company had received reports from “no less than seven” former employees who said that the unnamed franchisee had underpaid them and created a hostile work environment. The email finished with a grainy screenshot of a Facebook post containing a vulgar message that Mr. Polozola said had come from that same franchisee but didn’t have her name attached.The battle has put Ms. Cianci about $300,000 in debt and enmeshed Unleashed in a nasty court battle just as it tries to get its investment strategy off the ground.Lexey Swall for The New York TimesMs. Cianci, who had taken her son to a water park for his birthday, immediately started getting messages from other franchisees. None of it was true, she told them. As she would detail in court documents, the company allowed late payments for nearly all franchisees during the pandemic, and her gym had been closed by local ordinance for longer than most. She had continued to send her royalties in the mail, even after she refused to sign Unleashed’s new payment form, she said, and she was current on all her accounts when she was terminated. And the inappropriate Facebook post? She said she hadn’t written it.The allegations by Ms. Cianci’s former employees that Mr. Polozola referred to in his “friendly reminder” email sprang from messages that were sent by the workers in April 2021, before the Little Gym changed hands. After an investigation, no action was taken. The Unleashed spokesman said the company had relied on Ms. Cianci’s assurance that she would resolve the matter with the Maryland Department of Labor. Ms. Cianci said she made no such assurance.In response to an inquiry from The New York Times, the Department of Labor provided records showing a total of five complaints against Ms. Cianci for unpaid wages since 2017, two of which she resolved by paying her former employees; two were dropped; and one is still pending.But the emails from the former employees, which Unleashed supplied to The Times in unredacted form, detail complaints other than unpaid wages — such as dealing pills and mistreating children — that would seem to merit more immediate action by corporate headquarters, and which Ms. Cianci strongly denies.In late summer of 2021, when one of the former employees contacted Unleashed again, Mr. Polozola told Ms. Cianci to ignore it, according to an email exchange she provided — until he brought the complaints back up to discredit her nearly a year later.Arguing that such tactics seemed far outside the norms of legal practice, in September Ms. Cianci’s team filed a defense of so-called unclean hands, making the case that Unleashed Brands’ conduct had so tainted the proceedings that the judge should rule in their favor.But their motion never went anywhere. Before the judge could rule on it, Unleashed filed to dismiss its own case, arguing that its complaint that Ms. Cianci was essentially operating an unauthorized Little Gym was moot because her landlord had evicted her.The upshot of all this legal wrangling is that the fight between Ms. Cianci and Unleashed continues in arbitration in Arizona. In arbitration, potential damages are more limited, proceedings are sealed, and no precedent is created for other cases.Unleashed is fighting to stop Ms. Cianci from running what it says is a competing gym. Ms. Cianci is fighting for the chance to keep her new business and recoup the hundreds of thousands of dollars she has now spent on lawyers.One of them, Peter Lagarias, began his career at the F.T.C., enforcing the agency’s then-new franchise rule in the late 1970s, and spent most of his career advocating for franchisees both in the courtroom and the California statehouse. He took her case for a low rate, but arbitrators, whose cost must be split by both parties, can run tens of thousands of dollars, too.“They don’t want money,” Ms. Cianci said of Unleashed. “They want to destroy my life.”‘You can’t treat every business the same’Bill Walenda, 55, also got into running Little Gyms as a second career. After years as a financial planner, he wanted to buy a franchise — maybe a McDonald’s or a Dunkin’ Donuts — and his wife suggested The Little Gym, since he loved working with children. He opened a gym in New Jersey in 2002 and bought another in Illinois in 2009.After Ms. Cianci’s franchise was terminated, the Happy Handstands Franchisee Association fractured over strategy. Another group of owners started an association with a different approach: working “collaboratively” with the corporate office to provide feedback on changes. Mr. Walenda was elected president, and he has had limited success.He has been fighting a new point-of-sale system with a credit card processor controlled by Unleashed, which franchisees say is keeping customer payments for more than a week before sending them to gym owners, creating a cash flow crunch for owners. (Unleashed said the system keeps money for only two or three days.)The company also continues to try to make everyone use its new shared call center, which Mr. Walenda said would “take us out of the equation of dealing with our customers” — something that might work for a business like Urban Air, which processes thousands of people a week, but not the familial relationships on which The Little Gym operated for decades.“You can’t treat every business the same,” Mr. Walenda said. “And that’s really what’s causing all of this strife.”In November, Unleashed introduced a revised operations manual that lays out new rules and fees. It specifies the hours the businesses must be open, how quickly they must return customer calls, which architect they must use and what company meetings they must attend. Staff salaries were only supposed to make up 30 percent of revenue. The technology fee can rise to $399 from $119.The national advertising fee can rise to 5 percent of gross sales from 1 percent; part of that will go to a fund that supports other Unleashed properties. New fees appeared, including a $30,000 fee to renew the franchise agreement, and a fee of about $15,000 to relocate the facility. For some owners, the changes seem to mean that they can no longer operate profitably and will have to sell rather than renew.Unleashed said the changes only apply to new franchisees, and Mr. Walenda said his group has been able to negotiate away some of the fees even for them. But other fees remain, including a $100,000 payment if the franchise is terminated, and Mr. Walenda said the company continues to try to force everyone to use its call center and point-of-sale system. As much as he believes in the collaborative approach, he’s willing to litigate to stop the attempts to extract more money.“That’s all private equity cares about, as far as I’m concerned,” Mr. Walenda said. His business is doing well, which he credits to the postpandemic desperation for children’s activities; he said Unleashed’s new systems have mostly just taken more time for his managers to deal with.“We’re not people, we’re not businesses, we’re just numbers to them,” Mr. Walenda said. “And that’s a problem. Because ‘Let’s just keep squeezing everything we can out of them until we can’t squeeze anymore’ — it’s a good way of making money. It’s not a very good way to run a business.”Ms. Cianci says she hopes to prove that it’s possible to resist a franchiser’s efforts to impose its will outside what are supposed to be legally binding agreements.Lexey Swall for The New York TimesAfter a year of owning The Little Gym, Unleashed Brands says that average gym revenue rose 36.8 percent in 2022 over 2019. And its franchisee recruitment has focused on people who want to open multiple units, such as Cody Herndon, whom Unleashed provided as an example of a Little Gym owner with a more positive view of management.An Urban Air operator who sold one of his two parks to another private equity investor, Mr. Herndon bought the rights to open three Little Gyms in Texas last year. He said he was drawn by the opportunity to have longer-term relationships with families and thought the new systems Unleashed was pushing would work out in the end.“There are going to be so many massive benefits to any change that’s been asked,” Mr. Herndon said.While disclosing few other metrics, the company told Axios in May that it expected to generate $160 million in revenue in 2022 and was shopping for a buyer. It appears to have found one.Unleashed’s current private equity investors are selling their stakes in the company imminently, according to a company spokesman. But the company declined to disclose the buyer or the terms of the deal.Whoever the buyer may be, they’ve got significant franchisee rancor on their hands — even beyond the Little Gym.At Mr. Browning’s original chain, Urban Air, a franchisee association representing more than 50 owners tried to bring a lawsuit in 2020 over what it viewed as unfair changes that had revealed the “terms and provisions of the franchise agreements upon which investment decisions were made to be illusory and meaningless.” But a Texas court threw the case out on technical grounds, and with individual arbitration the only path forward, the effort fell apart.In late 2022, Unleashed was also sued by 54 franchisees of its Premier Martial Arts brand who said in legal filings that the franchisor gave them an unrealistic impression of the cost of running a martial arts studio, leaving them with dead-end businesses and debt.Michelle and Peter Silberman of Wexford, Pa., depleted their retirement savings, maxed out their credit cards and took out a home-equity loan to acquire three Premier Martial Arts territories in 2020.Ross Mantle for The New York TimesMichelle and Peter Silberman depleted their retirement savings, maxed out their credit cards and took out a home-equity loan to acquire three Premier Martial Arts territories in March 2020, before Unleashed owned the franchisor. The first opened near their home in the Pittsburgh area in May 2022. Mr. Silberman said Premier Martial Arts told them that they could expect profit margins as high as 48 percent, while running the studios as “semi-absentee” owners who had to run the business as little as 10 hours a week.The couple was charging parents $138 a month, which included two classes a week. The Silbermans, who had no experience with martial arts, said they relied on the company’s assurances that it would help them manage the business.But when attendance began to decline and expenses were piling up — the couple spent $370,000 acquiring the territories and operating the one facility — Mr. Silberman said Premier Martial Arts offered little additional help. Their studio closed this past fall. Although the trouble began long before Unleashed announced that it had bought Premier Martial Arts in early 2022, the lawsuit states that after the acquisition, “the same false statements were still made and the same bogus model was pitched.”In response, the Unleashed spokesman said the company is “not a party to any contract” with a Premier Martial Arts franchisee.As for the Silbermans, they have been trying to pay down their debts.“We are, hopefully, going to avoid bankruptcy by the skin of our teeth,” said Mr. Silberman.New rules for franchisesMs. Cianci’s case is winding its way through arbitration. Her new gym in a suburban mall next to Macy’s has only about 74 members, compared with the 275 she had before her termination by Unleashed. She said her husband, a federal trademark attorney, is working long hours to support them.In the meantime, she’s trying to prevent future franchisees from being put in the situation she found herself in.As the F.T.C. reviews the rules governing franchising, advocates have urged the commission to add stronger protections, such as more disclosure of how the average franchise location performs. The International Franchise Association — whose board Mr. Browning recently joined — has lobbied hard to avert those changes.In Congress, Senator Catherine Cortez Masto, a Democrat from Nevada, has done extensive research on problems with the franchise system and introduced two bills seeking to give franchisees more leverage. But their fate is uncertain.That’s why Ms. Cianci is focused on the states. Specifically Arizona, where The Little Gym headquarters is based. Lawmakers have introduced a bill that would protect franchisees’ right to form associations, require changes to their agreements to be presented in contractual form, and limit the circumstances under which their licenses could be terminated.At the very least, she hopes her case will ultimately prove that it’s possible to resist a franchisor’s efforts to impose its will outside what are supposed to be legally binding agreements, whether it’s how many birthday parties to offer or which insurance company to use.“That’s exactly what went wrong here,” Ms. Cianci said. “He’s buying companies where people had rights.” More