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    Starbucks Plans Wage Increases That Won’t Apply to Unionized Workers

    Starbucks announced Tuesday that it was raising pay and expanding training at corporate-owned locations in the United States. But it said the changes would not apply to the recently unionized stores, or to stores that may be in the process of unionizing, such as those where workers have filed a petition for a union election.On a call with investors to discuss the company’s quarterly earnings, the chief executive, Howard Schultz, said that the spending would bring investments in workers and stores to nearly $1 billion for the fiscal year and that it would help Starbucks keep up with customer traffic.“The investments will enable us to handle the increased demand — and deliver increased profitability — while also delivering an elevated experience to our customers and reducing strain on our partners,” Mr. Schultz said, using the company’s term for employees.The initiative was announced as the union has won initial votes at more than 50 Starbucks stores, including several this week.The pay increases follow a commitment to raise the company’s minimum hourly wage to $15 this summer and will include a raise of at least 5 percent for employees with two to five years of experience, or an increase to 5 percent above the starting wage rate in their market, whichever is greater.Employees with more than five years’ experience will receive a raise of at least 7 percent, or an increase to 10 percent above the starting wage in their market, whichever is greater.The company will also increase pay for store managers.The plans also call for doubling the training hours that new baristas receive, as well as additional training for existing baristas and shift supervisors.In a formal charge filed with the National Labor Relations Board, the union representing the newly unionized Starbucks workers — Workers United, an affiliate of the Service Employees International Union — has accused the company of coercing employees who were voting in a union election by suggesting that it would withhold new benefits if they unionized.The company said it was legally prohibited from unilaterally imposing wage and benefit increases in stores where employees have unionized or will soon vote on unionization. It noted that it must bargain with a union over any wage or benefit changes.But labor law experts said that it could be illegal to withhold wages and benefits from only unionized employees or employees voting on a union.Matthew Bodie, a former lawyer for the labor board who teaches law at Saint Louis University, said the announced pay increases could unlawfully taint the so-called laboratory conditions that are supposed to prevail during a union election by giving employees an incentive not to unionize.“If Starbucks said, ‘Drop the union campaign and you’ll get this wage increase and better benefits,’ that’d clearly be illegal,” Mr. Bodie said by email. “Hard to see how this is that much different in practice.”Mr. Bodie said the pay increases could also amount to a violation of the company’s obligation to bargain in good faith because they suggest an intention to give unionized employees a worse deal than nonunionized employees. “They’d have to at least offer this package to the union,” Mr. Bodie added.Reggie Borges, a Starbucks spokesman, did not say whether the company would make the same proposals announced Tuesday in negotiations with unionized workers but said, “Where Starbucks is required to engage in collective bargaining, Starbucks will always negotiate in good faith.”Starbucks also said it planned to post leaflets in stores to keep employees informed, in which the company says that the outcome of collective bargaining is uncertain and risky. “Through collective bargaining, wages, benefits and working conditions may improve, diminish or stay the same,” says one of the informational sheets to be posted in stores.Such messaging is common among employers facing union campaigns, but labor experts say it is misleading because workers are highly unlikely to see their compensation drop as a result of collective bargaining. More

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    Job Openings in U.S. Rose to Record in March

    A government survey released Tuesday showed a record number of job openings, with 11.5 million positions listed as available in March, underscoring the continuing strength of the labor market.The number of “quits” — a measurement of the amount of workers voluntarily leaving jobs — also reached a high, an indicator that many workers are confident they can leave their jobs and find employment that better suits their desires or needs.The data released by the Labor Department as part of its monthly Job Openings and Labor Turnover Survey, or JOLTS report, is a fresh indicator of the anomalous nature of the economy as it recovers from the pandemic recession. A resurgence of household spending and business investment is colliding with a messy reordering of the supply of goods and labor.Labor force participation has quickly recovered, nearing prepandemic rates, but has failed to keep up with the surge in job opportunities over the past year as business owners expand to meet the demand for a variety of goods and services.After a sharp climb last year, job openings plateaued somewhat. The March reading suggests that the decline in acute coronavirus concerns among experts and the average consumer — paired with the rolling back of public health restrictions and the start of the summer hiring season — is increasing businesses’ appetites for more workers. Layoffs and discharges remained uncommon, and relatively flat compared to the previous month, at 1.4 million.The Federal Reserve is raising the cost of borrowing as part of an effort to cool consumer spending, business lending and demand for workers. Markets expect the Fed to announce a half-percentage point increase in its benchmark interest rate on Wednesday.The State of Jobs in the United StatesJob openings and the number of workers voluntarily leaving their positions in the United States remained near record levels in March.March Jobs Report: U.S. employers added 431,000 jobs and the unemployment rate fell to 3.6 percent ​​in the third month of 2022.Job Market and Stocks: This year’s decline in stock prices follows a historical pattern: Hot labor markets and stocks often don’t mix well.New Career Paths: For some, the Covid-19 crisis presented an opportunity to change course. Here is how these six people pivoted professionally.Return to the Office: Many companies are loosening Covid safety rules, leaving people to navigate social distancing on their own. Some workers are concerned.Andrew Patterson, a senior international economist in Vanguard’s Investment Strategy Group, argued this strong report from the Labor Department on the eve of the central bank’s rate decision gives officials “more cover to continue to raise rates” and remove its longstanding financial support of the economy “expeditiously,” as the Fed chair, Jerome H. Powell, has said in recent weeks.Overall, even in an environment of higher borrowing costs, the remarkably robust desire among businesses to expand their work forces could help economic activity plow through the twin challenges presented by inflation, which is at a 40-year high, and the discombobulation of global supply chains compounded by coronavirus outbreaks in Asia and war in Eastern Europe.“If there’s something that’s going to cause a recession, it will be from some outside, exogenous shock,” said Nick Bunker, an economist at the Indeed Hiring Lab, a group that analyzes world labor markets. “It won’t be household spending.”Anonymized credit card data collected by Bank of America shows that even households with an annual income below $50,000 have about twice the savings they did before the pandemic. Still, a Gallup survey released last week found 46 percent of Americans rated their personal finances positively, down from 57 percent last year, when families were freshly benefiting from rounds of federal aid and inflation remained tame.Employers have been rankled, too, complaining of labor shortages as millions of workers — energized by the discussion about “essential work” during the pandemic and buoyed by savings — experience a degree of bargaining power they haven’t had in decades.That has led to a tense, politically charged dynamic in which wage pressures are a broadening complaint among large and small businesses trying to maintain their profit margins, even though jumps in pay haven’t generally kept up with price increases.“We’re learning a lot about how structurally fragile our economy is,” said Claudia Sahm, a former Federal Reserve economist. She cited a dependence on “endless low-wage workers and just-in-time supplies of goods” for keeping consumer prices depressed for many years.The employment cost index, which tracks wages and benefits, jumped by the most on record in the first quarter of this year, according to Labor Department figures released last week. Still, a recent analysis by the Economic Policy Institute, a left-leaning think tank in Washington, concluded that roughly 54 percent of the overall increase in prices in the nonfinancial corporate sector since the second quarter of 2020 could be attributed to an expansion of profit margins, while labor costs were responsible for less than 8 percent of price increases. The analysis indicates that 38 percent of the uptick stems from nonlabor input costs, such as overhead, fuel or raw materials.That data complicates the increasingly popular narrative that the spikes in worker pay are mostly to blame for the severity of price increases, rather than a wider mix of reasons.“Normally, you’d expect profits to decrease during a period of high inflation,” said Tony Roth, the chief investment officer of Wilmington Trust Investment Advisors, an arm of M&T Bank. The reason the opposite has happened for many companies over the last couple of years is, he said, straightforward: “Businesses are doing it because they can get away with it.”The economy, while strong, may be locked in a vexing, self-reinforcing cycle for a while: The continued wave of household spending has often signaled to businesses that they had room to raise prices without consequence — allowing executives to hire more workers while maintaining profitability.Until more consumers balk at heightened price levels, it’s unclear where prices and demand will find an equilibrium.Mr. Roth said his financial firm, like most others, was advising clients to invest in companies that still had a large amount of “pricing power” — meaning that they can raise prices without dampening demand for what they sell, either because the good or service is particularly desirable or because it is essential to the buyers’ life routines or business needs. More

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    Job openings and the level of people quitting their jobs reached records in March

    Job openings hit a record-high 11.55 million in March, according to the Labor Department’s JOLTS report.
    Quits totaled 4.54 million, also a record and indicative that the labor market remains historically tight.
    The gap between open jobs and available workers hit 5.6 million, another new high.

    A “now hiring” sign is posted in the window of an ice cream shop in Los Angeles, California on January 28, 2022.
    Frederic J. Brown | AFP | Getty Images

    Employment openings exceeded the level of available workers by 5.6 million in March while a record number of people quit their jobs, the Labor Department reported Tuesday.
    The level of job postings hit 11.55 million for the month, also a fresh record for data that goes back to December 2000, according to the Job Openings and Labor Turnover Survey. That was up 205,000 from February and representative of a jobs market still historically tight.

    At the same time, quits totaled 4.54 million, an increase of 152,000 from the previous month as the so-called Great Resignation continued. The Covid pandemic era has seen opportunities for workers who feel confident enough to leave their current situations for better employment elsewhere.
    The report adds to an inflationary picture that is expected to push the Federal Reserve into a series of aggressive rate hikes, starting with a half-percentage point move Wednesday.
    A shortage of labor supply during the pandemic has caused a surge in wages, with average hourly earnings up 5.6% from a year ago in March. Still, that hasn’t kept up with inflation, which has run at an 8.5% pace over the same time period.
    Supply failed to keep up with demand in March, with the level of new hires actually declining slightly to 6.74 million despite the increase in openings. Total separations rose to 6.32 million, a rise of nearly 4% from February.
    Job openings in the pivotal leisure and hospitality industry declined by 45,000, a drop of 2.6% on a monthly basis, while hiring increased by 40,000. The sector is considered a key proxy for the economic recovery and has an unemployment rate of 5.9%, still a bit higher than its pre-pandemic level.

    Tuesday’s release comes the same week as the key April nonfarm payrolls report. Economists surveyed by Dow Jones expect an increase of 400,000 jobs and a decline in the unemployment rate to 3.5%, which would match the pre-pandemic rate that was the lowest since December 1969.
    Correction: Job openings in the pivotal leisure and hospitality industry declined by 45,000. An earlier version misstated the category.

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    The Era of Cheap and Plenty May Be Ending

    Supplies of goods are coming up short in the pandemic, and prices have jumped. Some economists warn that the changes could linger.For the past three decades, companies and consumers benefited from cross-border connections that kept a steady supply of electronics, clothes, toys and other goods so abundant it helped prices stay low.But as the pandemic and the war in Ukraine continue to weigh on trade and business ties, that period of plenty appears to be undergoing a partial reversal. Companies are rethinking where to source their products and stocking up on inventory, even if that means lower efficiency and higher costs. If it lasts, such a shift away from fine-tuned globalization could have important implications for inflation and the world’s economy.Economists are debating whether recent supply chain turmoil and geopolitical conflicts will result in a reversal or reconfiguration of global production, in which factories that were sent offshore move back to the United States and other countries that pose less of a political risk.If that happens, a decades-long decline in the prices of many goods could come to an end or even begin to go in the other direction, potentially boosting overall inflation. Since around 1995, durable goods like cars and equipment have tamped down inflation, and prices for nondurable goods like clothing and toys have often grown only slowly.Those trends began to change in late 2020 after the onset of the pandemic, as shipping costs soared and shortages collided with strong demand to push car, furniture and equipment prices higher. While few economists expect the past year’s breakneck price increases to continue, the question is whether the trend toward at least slightly pricier goods will last.The answer could hinge on whether a shift away from globalization takes hold.“It would certainly be a different world — it might be a world of perhaps higher inflation, perhaps lower productivity, but more resilient, more robust supply chains,” Jerome H. Powell, the Fed chair, said at an event last month when asked about a possible move away from globalization.Still, Mr. Powell said, it’s not obvious how drastically conditions will change. “It’s not clear that we’re seeing a reversal of globalization,” he said. “It’s clear that it’s slowed down.”Prices Have Shot UpPrices for durable goods had been falling for decades. Lately, though, they’ve been a major factor pushing inflation higher.

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    Annual Change in the Personal Consumption Expenditure Index by Category
    Source: Commerce DepartmentBy The New York TimesThe period of global integration that prevailed before the pandemic made many of the things Americans buy cheaper. Computers and other technology made factories more efficient, and they chugged out sneakers, kitchen tables and electronics at a pace unmatched in history. Companies slashed their production cost by moving factories offshore, where wages were lower. The adoption of steel shipping containers, and ever larger cargo ships, allowed products to be whisked from Bangladesh and China to Seattle and Tupelo and everywhere in between for astonishingly low prices.But those changes also had consequences for American factory workers, who saw many jobs disappear. The political backlash to globalization helped carry former President Donald J. Trump into office, as he promised to bring factories back to the United States. His trade wars and rising tariffs encouraged some companies to move operations out of China, although typically to other low-cost countries like Vietnam and Mexico.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.The pandemic also exposed the snowball effect of highly optimized supply chains: Factory shutdowns and transportation delays made it difficult to secure some goods and parts, including semiconductors that are crucial for electronics, appliances and cars. Shipping costs have soared by a factor of 10 in just two years, erasing the cost savings of making some products overseas.Starting late in 2020, prices for washing machines, couches and other big products jumped sharply as production limitations collided with high demand.Inflation has only accelerated since. Russia’s invasion of Ukraine has further snarled supply chains, raising the prices of gas and other commodities in recent months and helping to push the Fed’s closely watched inflation index up 6.6 percent over the year through March.That is the fastest pace of inflation since 1982, and price gains are touching the highest level in decades across many advanced economies, including the eurozone and Britain.Many economists expect price increases for durable goods to cool substantially in the months ahead, which should help calm overall price gains. Data from March suggested that they were beginning to moderate. Rising Fed interest rates could help temper buying, as borrowing to buy cars, machines or home improvement supplies becomes more expensive.But there are still questions about whether — in light of what companies and countries have learned — major products will return to the steady price declines that were the norm before the coronavirus.It’s not clear yet to what extent factories are moving closer to home. A “reshoring index” published by Kearney, a management consulting firm, was negative in 2020 and 2021, indicating that the United States was importing more manufactured goods from low-cost countries.But more firms reported moving their supply chains out of China to other countries, and American executives were more positive about bringing more manufacturing to the United States.Duke Realty, which rents warehouse and industrial facilities in the United States, expects the change to be a source of demand in years to come, though the reworking may take a while. Customers are “now future-proofing their supply chains,” Steve Schnur, the firm’s chief operating officer, said on an earnings call last week.“Some reshoring is occurring — let’s make no mistake about that,” Ngozi Okonjo-Iweala, the director general of the World Trade Organization, said in an interview. But the data show that most businesses are mitigating risk by building up their inventories and finding additional suppliers in low-cost countries, Dr. Okonjo-Iweala said. That process could end up integrating poorer countries in Africa and other parts of the world more deeply into global value chains, she said.Janet L. Yellen, the Treasury secretary, said last month that supply chains had proved too vulnerable given the pandemic and the war in Ukraine, and urged a reorientation around “a large group of trusted partners,” an approach she called “friendshoring.”The approach might result in some higher costs, she said, but it would be more resilient, and a large enough group would allow countries to maintain efficiencies from the global division of labor.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Fears of a Fed mistake grow as this week's anticipated interest rate hike looms

    Markets expect the Federal Reserve on Wednesday to announce a half-percentage point increase in its benchmark interest rate.
    Fears are growing over how aggressive the central bank will have to be to tame inflation.
    “A recession at this stage is almost inevitable,” former Fed vice chair Roger Ferguson told CNBC.

    Jerome Powell, Chairman of the U.S. Federal Reserve, attends the National Association of Business Economicseconomic policy conference in Washington, D.C, United States on March 21, 2022.
    Yasin Ozturk | Anadolu Agency | Getty Images

    The Federal Reserve is tasked with slowing the U.S. economy enough to control inflation but not so much that it tips into recession.
    Financial markets expect the central bank on Wednesday to announce a half-percentage point increase in the Fed’s benchmark interest rate. The fed funds rate controls the amount that banks charge each other for short-term borrowing but also serves as a signpost for many forms of consumer debt.

    Doubts are rising about whether it can pull it off, even among some former Fed officials. Wall Street saw another day of whipsaw trading Monday afternoon, with the Dow Jones Industrial Average and S&P 500 rebounding after being down more than 1% earlier in the session.
    “A recession at this stage is almost inevitable,” former Fed vice chair Roger Ferguson told CNBC’s “Squawk Box” in a Monday interview. “It’s a witch’s brew, and the probability of a recession I think is unfortunately very, very high because their tool is crude and all they can control is aggregate demand.”

    Indeed, it’s the supply side of the equation that is driving most of the inflation problem, as the demand for goods has outstripped supply in dramatic fashion during the Covid-era economy.
    After spending much of 2021 insisting that the problem was “transitory” and would likely dissipate as conditions returned to normal, Fed officials this year have had to acknowledge the problem is deeper and more persistent than they acknowledged.
    Ferguson said he expects the recession to hit in 2023, and he hopes it “will be a mild one.”

    Hiking and ‘the recession that comes with it’

    That sets up this week’s Federal Open Market Committee as pivotal: Policymakers not only are almost certain to approve a 50-basis-point interest rate hike, but they also are likely to announce a reduction in bond holdings accumulated during the recovery.
    Chair Jerome Powell will have to explain all that to the public, drawing a line between a Fed determined to crush inflation while not killing an economy that lately has looked vulnerable to shocks.

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    “What that means is you’re going to have to hike enough to maintain credibility and start to shrink the balance sheet, and he’s going to have to take the recession that comes with it,” said Danielle DiMartino Booth, CEO of Quill Intelligence and a top advisor to former Dallas Fed President Richard Fisher while he served. “That’s going to be an extremely difficult message to communicate.”
    The recession chatter on Wall Street has intensified a bit lately, though most economists still think the Fed can tighten inflation and avoid a crash landing. Market pricing indicates this week’s increase of 50 basis points is to be followed by a hike of 75 basis points in June before the Fed settles back into a slower pace that eventually takes the funds rate to as high as 3% by the end of the year.
    But none of that is certain, and it will depend largely on an economy that contracted at 1.4% annualized pace in the first quarter of 2022. Goldman Sachs said it sees that reading dropping to a 1.5% decline, though it expects second-quarter growth of 3%.

    Fears of bad timing

    There are “growing risks” in the economy that could derail the Fed’s plans, said Tom Porcelli, chief U.S. economist at RBC Capital Markets.
    “For starters, while everyone seems very focused on here and now data/earnings that seem to suggest all is fine at the moment, the problem is cracks are building,” Porcelli said in a note. “Moreover, this is all happening as inflationary pressures are quite likely to slow — and possibly slow more than seems appreciated at the moment.”
    Monday brought fresh signs that growth at least could be slowing: The ISM Manufacturing Index for April decreased to 55.4, indicative of a sector still expanding but at a reduced pace. Perhaps more importantly, the employment index for the month was just 50.9 — a reading of 50 indicates expansion, so April pointed to a near-halt in hiring.
    And what of inflation?
    Twelve-month readings are still registering the highest levels in about 40 years. But the Fed’s preferred measure saw a monthly gain of just 0.3% in March. The Dallas Fed’s trimmed mean, which throws out readings at either end of the range, tumbled from 6.3% in January down to 3.1% in March.
    Those kinds of numbers conjure up the worst fears on Wall Street, namely that a Fed way behind the curve on inflation when it began now may be as recalcitrant when it comes to tightening.
    “They’re going to reiterate, ‘Look, we’re going to be data-sensitive. If the data changes, we’ll change what we’re expected to do,'” said James Paulsen, chief investment strategist at The Leuthold Group. “There’s certainly some slower real growth going on. It’s not falling off a cliff, for sure, but it’s moderating. I think they’ll be more sensitive to that down the road.”

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    Home affordability is nearly the worst on record as mortgage rates spike

    The average rate on the popular 30-year fixed started this year at 3.29% and hit 5.55% on Monday, according to Mortgage News Daily.
    The vast majority, 95%, of the 100 largest U.S. housing markets are now less affordable than their long-term levels, up from just 6% at the start of the Covid pandemic, according to Black Knight data.
    If rates were to rise just 50 basis points more or home prices were to increase just 5% more, home affordability would be the worst on record.

    A “For Sale” sign outside a home in Louisville, Kentucky.
    Luke Sharrett | Bloomberg | Getty Images

    Mortgage rates just hit their highest level since 2009, and home prices are continuing to experience double-digit gains. Now, nearly all of the major housing markets in the United States are less affordable than they have been historically, and affordability is near its worst point on record.
    New calculations from Black Knight, a mortgage technology and data provider, show that 95% of the 100 biggest U.S. housing markets are less affordable than their long-term levels. That figure was at 6% at the start of the Covid pandemic. Thirty-seven markets are less affordable than they have ever been.

    Home price gains did pull back slightly in March, but they were still up 19.9% year over year. Compared with February, prices rose 2.3%, the fifth time since the pandemic began when home prices rose more than 2% in a single month. Prices were up 5.9% in the first three months of the year. Consumers are grappling with rising prices across categories, from real estate to airfare to groceries.
    The average rate on the popular 30-year fixed started this year at 3.29% and hit 5.55% on Monday, according to Mortgage News Daily. Rates could move even higher after Wednesday’s Federal Reserve meeting, when markets will get more commentary on the Fed’s drive to curb inflation.

    Homebuying affordability has not been this bad since July 2006, when rates were around 6.75%. Then, it took about 34% of the median income to cover the monthly mortgage payment, including principal and interest, for a home purchased with a 20% down payment.
    As of April 21, that payment-to-income ratio had reached 32.5%. Historically, a ratio above 21% has caused the housing market to cool off, with the exception of the last two years. The pandemic has created an anomaly in the housing market, because demand is so high and supply is so low.
    If rates were to rise just 50 basis points more or home prices were to increase just 5% more, home affordability would be the worst on record, according to Black Knight. (Of those two factors, the 5% rise in prices would be more likely.)

    It is often said in the housing market that consumers don’t buy the home price, they buy the monthly payment. That payment is at a new high, up $552 (an increase of 38%) year to date to $1,809, and up $790 (or 72%) since the onset of the pandemic.
    In reaction to weaker affordability, consumers are suddenly turning to adjustable-rate mortgages, which offer a lower interest rate. The ARM share of rate locks from potential homebuyers jumped from 2.5% in December to nearly 8% in March, according to Black Knight. As of last week, that share was more than 9%, according to the Mortgage Bankers Association.

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    The Federal Reserve's fight with inflation could cool the hot labor market, risking stagflation

    The Federal Reserve plans to hike interest rates to a neutral rate in 2022, estimated to be between 2 and 3.5%
    The central bank hopes that swift tightening will prevent the risk of stagflation.
    Stagnation describes the duel threat of stagnant economic growth and persistent inflation.

    The Federal Reserve is hiking interest rates in an effort to defuse an explosive year of price inflation. But global forces could neutralize the effects of that tightening of monetary policy, and keep inflation high.
    Some observers believe the U.S. government may have misread the looming threat of inflation. During the pandemic, Uncle Sam dispersed historic sums of cash to blunt widespread economic damage. Analysts say this stimulus produced strong household savings. A boom in demand for durable goods followed.

    This surge in demand came as global supply chains stalled out, and a persistent bout of inflation followed. In March 2022, prices across all categories rose to historic levels, 8.5% year over year. And investors believe the price hikes aren’t over yet, according to a New York Federal Reserve survey.
    “The only way to break the back of inflation that’s running out of control is for very tight monetary policy, ” says Richard Fisher, former President of the Federal Reserve Bank of Dallas. “It slows things down because everything becomes expensive.”
    Today’s inflation isn’t spiraling in the way it did in the recent past, however. From 1965 to 1982, inflation soared, at times reaching double-digit rates. In 1979, the central bank, under Chair Paul Volcker, kicked off a tightening cycle that resulted in interest rates of nearly 20%.

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    Surging prices force consumers to ask: Can I live without it?

    Spending habits are starting to shift as consumers set their priorities.
    Consumer prices have risen at the fastest clip in four decades.
    Some companies like airlines have benefitted, while Amazon is seeing a slowdown.

    A pedestrian carries shopping bags in the Herald Square area of New York, U.S., on Wednesday, April 13, 2022.
    Calla Kessler | Bloomberg | Getty Images

    Sandy Magny plans to take her teenage daughter to West Palm Beach, Florida, this summer, even though airfares are surging.
    It won’t be cheap, but Magny doesn’t want to miss out on visiting her family. The 40-year-old paralegal, who lives in the Bronx and works in the financial district of Manhattan, is finding there are other things she can do without.

    “I do bring lunch more,” she said. “I could make coffee in the office.”
    Magny is one of millions of people starting to shift where her dollars go after two years of the Covid-19 pandemic. Consumer prices have increased at the fastest clip in four decades. The cost of everything from housing to a latte is on the rise, begging the questions: When — and where — will consumers cut spending?
    Some companies are already feeling the impact as they try to pass higher costs along to customers.
    Amazon’s most recent quarterly sales grew at the slowest pace since the 2001 dot-com bust. Netflix lost subscribers in the last quarter for the first time in more than a decade. Video game maker Activision Blizzard, home appliance giant Whirlpool and 1-800-Flowers all reported weaker sales in the last quarter.
    Meanwhile, companies from Ford to McDonald’s to Kraft Heinz to United Airlines have reported resilient demand as consumers keep spending in spite of higher prices.

    The changes in consumer behavior have some executives on edge.
    “We do believe that the consumer is going to be spending,” Macy’s CFO Adrian Mitchell said at JP Morgan’s Retail Round-Up last month. “But are they going to be spending on discretionary items that we sell, or are they going to be spending on an airline ticket to Florida, or travel, or going out to restaurants more?” 
    Coca-Cola CEO James Quincey told CNBC last week that customers won’t “swallow inflation endlessly.” 
    Consumer spending, as measured by the Commerce Department, rose a seasonally-adjusted 1.1% in March. And spending remains strong even among low-income households with an annual income of less than $50,000, according to Bank of America data. (The data exclude households that do not have access to cards.)
    But consumer confidence, a measure of shoppers’ sentiments around market conditions reported by The Conference Board, ticked lower in April.
    “We’re not really seeing many signs of slowdown, despite the worries that are happening in the market,” said Anna Zhou, a U.S. economist for Bank of America.
    One reason is the amount of money that people socked away during the pandemic. On average, low-income households have $3,000 in their savings and checking accounts – nearly double what they had at the start of 2019, according to the Bank of America’s internal data. That has given consumers a buffer, even as they pay more at the gas pump and grocery store, Zhou said.

    Only the good stuff

    Many customers aren’t only spending, but are finding themselves increasingly willing to splurge, whether on a higher-end pair of Levi’s jeans or a first-class seat on a Delta Air Lines flight.
    Apple on Thursday reported a “record level of upgraders” during the first three months of the year as users opted for its more premium iPhones, but warned about the impact of lockdowns in China. And as automakers raise prices to reflect tight inventory from global supply chain issues, car-seekers aren’t getting scared off.
    Ford CFO John Lawler said this week that despite price increases, the company is still seeing exceptionally strong demand for its newest products, ranging from the small Maverick pickup, which starts around $20,000, to the electric Mustang Mach-E crossover, which in higher trims can cost well over $60,000. It’s already sold out for the 2022 model year.
    United, Delta and Southwest Airlines are predicting 2022 profits thanks to seemingly insatiable demand from customers after two brutal pandemic years, both for leisure and business travel. Their own staffing constraints are holding them back flying even more.
    U.S. round-trip domestic airfare for travel between Memorial Day and Labor Day averaged $526, up more than 21% from 2019, according to Airlines Reporting Corp.’s data from travel agencies.
    “The demand environment is the strongest it’s been in my 30 years in the industry,” United Airlines CEO Scott Kirby said in an April 20 earnings release.

    Travelers walk through Terminal A at Orlando International Airport on Christmas Day, Saturday, December 25, 2021.
    Stephen M. Dowell | Orlando Sentinel | Getty Images

    Levi Strauss & Co. Chief Executive Officer Chip Bergh told CNBC last month that in spite of rising prices, consumers weren’t trading down to less-expensive denim. Levi reaffirmed its outlook for fiscal 2022, which calls for revenue to grow between 11% and 13% from the prior year. 
    But signs are emerging that consumer appetite might be nearing its limit.
    Domestic U.S. airline bookings in the first two weeks of April fell 2% compared with the previous two weeks, the first decline over such a timeframe this year, according to Adobe Analytics. In March, bookings rose 12% from 2019, but customer spending on those tickets soared 28%.
    March restaurant traffic fell 1.7%, according to industry tracker Black Box Intelligence. Fine dining, upscale casual and family dining establishments saw the biggest jump in sales growth, but the segments are still trying to claw back from pandemic lows.
    Jodi Klobus a 58-year-old mother of three and grandmother of four who lives outside of Albany, N.Y., told CNBC she and her husband, a retired New York City police officer, used to dine out twice a week. Now that their meals, and everything else, cost more, they’ve scaled back to twice a month.
    “I feel it in the pocketbook,” Klobus said.

    Challenges ahead in 2023

    And there are other risks looming that could crimp consumer spending, even if the impact isn’t immediate. Rents are marching higher and property taxes haven’t fully caught up to skyrocketing home values.
    The Federal Reserve is aiming to tackle inflation by raising interest rates. That translates to higher borrowing costs for homebuyers and credit card users.
    In the fourth quarter, U.S. credit card balances rose by $52 billion, the biggest quarterly jump in 22 years of New York Fed data, but they are still down $71 billion from the end of 2019.
    U.S. credit card delinquency rates rose to 1.62% from a more than three-decade low of 1.48% in the second quarter of last year, still far from the 6.6% peak hit in the first quarter of 2009, the tail-end of the Great Recession, according to the St. Louis Fed.
    “For this year, consumer spending should remain resilient,” said Zhou, the Bank of America economist. “For next year, it’s a little less certain – and certainly toward the second half of next year, that’s when risk of more of a slowdown in consumer can arise.”

    I just complain about the prices.

    Cindy Maher
    of Bloomfield, Connecticut

    Boeing CEO Dave Calhoun on Wednesday said demand for new planes from airlines is recovering thanks to a resurgence of travel demand. Yet it’s unclear whether Americans will keep splurging on trips in the months ahead or will hit a point when they’ll cut back.
    “That second year, when inflation begins to take a toll on consumers’ pocket, that is when those numbers really begin to matter to us,” Calhoun said in an interview with CNBC’s “Squawk on the Street.”
    For the moment, many consumers, like Cindy Maher, a 58-year-old who owns a leadership development consulting firm and lives in Bloomfield, Connecticut, feel comfortable enough to maintain their spending habits.
    “I’m not cutting back,” she said. “I just complain about the prices.”
    Maher said she’s noticed nearly $7 loaves of bread and that it costs $70 to fill up the tank of her car. But she said in her two-income household, she can absorb those costs.
    “My heart goes out to those who have low-paying jobs,” she said.
    –CNBC’s Amelia Lucas and John Rosevear contributed to this article.

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