Consumer Behavior

More stories

  • 88 Shares169 Views

    in Economy

    Is Good News Finally Good News Again?

    by

    Economists had been wary of strong economic data, worried that it meant inflation might stay high. Now they are starting to embrace it.Good news is bad news: It had been the mantra in economic circles ever since inflation took off in early 2021. A strong job market and rapid consumer spending risked fueling further price increases and evoking a more aggressive response from the Federal Reserve. So every positive report was widely interpreted as a negative development.But suddenly, good news is starting to feel good again.Inflation has finally begun to moderate in earnest, even as economic growth has remained positive and the labor market has continued to chug along. But instead of interpreting that solid momentum as a sign that conditions are too hot, top economists are increasingly seeing it as evidence that America’s economy is resilient. It is capable of making it through rapidly changing conditions and higher Fed interest rates, allowing inflation to cool gradually without inflicting widespread job losses.A soft economic landing is not guaranteed. The economy could still be in for a big slowdown as the full impact of the Fed’s higher borrowing costs is felt. But recent data have been encouraging, suggesting that consumers remain ready to spend and employers ready to hire at the same time as price increases for used cars, gas, groceries and a range of other products and services slow or stop altogether — a recipe for a gentle cool-down.“If you go back six months, we were in the ‘good news is bad news’ kind of camp because it didn’t look like inflation was going to come down,” said Jay Bryson, chief economist at Wells Fargo. Now, he said, inflation is cooling faster than some economists expected — and good news is increasingly, well, positive.

    .dw-chart-subhed {
    line-height: 1;
    margin-bottom: 6px;
    font-family: nyt-franklin;
    color: #121212;
    font-size: 15px;
    font-weight: 700;
    }

    Year-over-year percentage change in the Personal Consumption Expenditures index
    Source: Bureau of Economic AnalysisBy The New York TimesMarkets seem to agree. Stocks climbed on Friday, for instance, when a spate of strong economic data showed that consumers continued to spend as wages and price increases moderated — suggesting that the economy retains strength despite cooling around the edges. Even the Fed chair, Jerome H. Powell, has suggested that evidence of consumer resilience is welcome as long as it does not get out of hand.“The overall resilience of the economy, the fact that we’ve been able to achieve disinflation so far without any meaningful negative impact on the labor market, the strength of the economy overall, that’s a good thing,” Mr. Powell said during a news conference last week. But he said the Fed was closely watching to make sure that stronger growth did not lead to higher inflation, which “would require an appropriate response for monetary policy.”Mr. Powell’s comments underline the fundamental tension in the economy right now. Signs of an economy that is growing modestly are welcome. Signs of rip-roaring growth are not.In other words, economists and investors are no longer rooting for bad news, but they aren’t precisely rooting for good news either. What they are really rooting for is normalization, for signs that the economy is moving past pandemic disruptions and returning to something that looks more like the prepandemic economy, when the labor market was strong and inflation was low.As the economy reopened from its pandemic shutdown, demand — for goods and services, and for workers — outstripped supply by so much that even many progressive economists were hoping for a slowdown. Job openings shot up, with too few unemployed workers to fill them.

    .dw-chart-subhed {
    line-height: 1;
    margin-bottom: 6px;
    font-family: nyt-franklin;
    color: #121212;
    font-size: 15px;
    font-weight: 700;
    }

    Monthly job openings per unemployed worker
    Note: Data is up to June 2023 and is seasonally adjusted.Source: Bureau of Labor StatisticsBy The New York TimesBut now the economy is coming into better balance, even though growth hasn’t ground to a standstill.“There’s a difference between things decelerating and normalizing versus actually crashing,” said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, a liberal research organization. “You could cheer for a normalization coming out of these crazy past couple years without going the next step and cheering for a crash.”That is why many economists seem to be happy as employers continue to hire, consumers splurge on Taylor Swift and Beyoncé concert tickets, and vacationers pay for expensive overseas trips — resilience is not universally seen as inflationary.Still, Kristin Forbes, an economist at the Massachusetts Institute of Technology, said it was too simple to argue that all signs of strength were welcome. “It depends on what the good news is,” she said.For instance, sustained rapid wage growth would still be a problem, because it could make it hard for the Fed to lower inflation completely. That’s because companies that are still paying more are likely to try to charge customers more to cover their growing labor bills.And if consumer demand springs back strongly and in a sustained way, that could also make it hard for the Fed to fully stamp out inflation. While price increases have moderated notably, they remain more than twice the central bank’s target growth rate after stripping out food and fuel prices, which bounce around for reasons that have little to do with economic policy.“We are closer to normal now,” said Michael Strain, director of economic policy studies at the American Enterprise Institute. “It makes it seem like good news is good news again — and that’s certainly how investors feel. But the more that good news becomes good news, the higher the likelihood of a recession.”Mr. Strain explained that if stocks and other markets responded positively to signs of economic strength, those more growth-stoking financial conditions could keep prices rising. That could prod the Fed to react more aggressively by raising rates higher down the road. And the higher borrowing costs go, the bigger the chance that the economy stalls out sharply instead of settling gently into a slower growth path.Jan Hatzius, the chief economist at Goldman Sachs, thinks the United States will pull off a soft landing — perhaps one so soft that the Fed might be able to lower inflation over time without unemployment having to rise.But he also thinks that growth needs to remain below its typical rate, and that wage growth must slow from well above 4 percent to something more like 3.5 percent to guarantee that inflation fully fades.“The room for above-trend growth is quite limited,” Mr. Hatzius said, explaining that if growth does come in strong he could see a scenario in which the Fed might lift interest rates further. Officials raised rates to a range of 5.25 to 5.5 percent at their meeting last month, and investors are watching to see whether they will follow through on the one final rate move that they had earlier forecast for 2023.Mr. Hatzius said he and his colleagues weren’t expecting any further rate moves this year, “but it wouldn’t take that much to put November back on the table.”One reason economists have become more optimistic in recent months is that they see signs that the supply side of the supply-demand equation has improved. Supply chains have returned mostly to normal. Business investment, especially factory construction, has boomed. The labor force is growing, thanks to both increased immigration and the return of workers who were sidelined during the pandemic.Increased supply — of workers and the goods and services they produce — is helpful because it means the economy can come back into balance without the Fed having to do as much to reduce demand. If there are more workers, companies can keep hiring without raising wages. If more cars are available, dealers can sell more without raising prices. The economy can grow faster without causing inflation.And that, by any definition, would be good news. More

  • 163 Shares99 Views

    in Economy

    GDP Grew at 2.4% Rate in Q2 as US Economy Stayed on Track

    by

    The reading on gross domestic product was bolstered by consumer spending, showing that recession forecasts early in the year were premature, at least.The economic recovery stayed on track in the spring, as American consumers continued spending despite rising interest rates and warnings of a looming recession.Gross domestic product, adjusted for inflation, rose at a 2.4 percent annual rate in the second quarter, the Commerce Department said Thursday. That was up from a 2 percent growth rate in the first three months of the year and far stronger than forecasters expected a few months ago.Consumers led the way, as they have throughout the recovery from the severe but short-lived pandemic recession. Spending rose at a 1.6 percent rate, with much of that coming from spending on services, as consumers shelled out for vacation travel, restaurant meals and Taylor Swift tickets.“The consumer sector is really keeping things afloat,” said Yelena Shulyatyeva, an economist at BNP Paribas.The resilience of the economy has surprised economists, many of whom thought that high inflation — and the Federal Reserve’s efforts to stamp it out through aggressive interest-rate increases — would lead to a recession, or at least a clear slowdown in the first half of the year. For a while, it looked as if they were going to be right: Tech companies were laying off tens of thousands of workers, the housing market was in a deep slump and a series of bank failures set up fears of a financial crisis.Instead, layoffs were mostly contained to a handful of industries, the banking crisis did not spread and even the housing market has begun to stabilize.“The things we were all freaked out about earlier this year all went away,” said Michael Gapen, chief U.S. economist at Bank of America.Inflation has also slowed significantly. That has eased pressure on the Fed to keep raising rates, leading some forecasters to question whether a recession is such a sure thing after all. Jerome H. Powell, the Fed chair, said on Wednesday that the central bank’s staff economists no longer expected a recession to begin this year.Still, many economists say consumers are likely to pull back their spending in the second half of the year, putting a drag on the recovery. Savings built up earlier in the pandemic are dwindling. Credit card balances are rising. And although unemployment remains low, job growth and wage growth have slowed.“All those tailwinds and buffers that were supporting consumption are not as strong anymore,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “It feels to me like this hard landing has been delayed rather than canceled.” More

  • 138 Shares189 Views

    in Economy

    Fed Officials Were Wary About Slow Inflation Progress at June Meeting

    by

    Federal Reserve officials are debating how high to raise interest rates to fully wrangle inflation. The debate was in focus at their meeting last month.Federal Reserve officials were concerned about sluggish progress toward lower inflation and wary about the surprising staying power of the American economy at their June meeting — so much so that some even wanted to raise rates last month, instead of holding them steady as the central bank ultimately did, minutes from the gathering showed.Fed officials decided to leave interest rates unchanged at their June 13-14 gathering to give themselves more time to see how the 10 straight increases they had previously made were affecting the economy. Higher interest rates slow the economy by making it more expensive to borrow and spend money, but it takes months or even years for their full effects to play out.At the same time, officials released economic forecasts that suggested they would make two more quarter-point rate increases this year. That forecast was meant to send a message: Fed policymakers were simply slowing the pace of rate increases by taking a meeting off. They were not stopping their assault against rapid inflation.The meeting minutes, released Wednesday, both reinforced the message that further interest rates increases were likely and offered more detail on the June debate — underscoring that Fed officials were divided about how the economy was shaping up and what to do about it.All 11 of the Fed’s voting officials supported the June rate hold, but that unanimity concealed tensions under the surface. Some of the central bank’s officials — 18 in total, including 7 who do not vote on policy this year — were leaning toward a rate increase.While “almost all” Fed officials thought it was “appropriate or acceptable” to leave rates unchanged in June, “some” either favored raising interest rates or “could have supported such a proposal” given continued strength in the labor market, persistent momentum in the economy, and “few clear signs” that inflation was getting back on track, the minutes showed.And officials remained worried that if they failed to wrestle inflation under control quickly, there was a risk it could become such a normal part of everyday life that it would prove harder to stamp out down the road.“Almost all participants stated that, with inflation still well above the Committee’s longer-run goal and the labor market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation might cause inflation expectations to become unanchored remained key factors shaping the policy outlook,” the minutes said.The minutes underlined what a difficult moment this is for the Fed. Inflation has come down notably on an overall basis, but that is partly because food and fuel prices are cooling off. An inflation measure that strips out those volatile categories — known as core inflation — is making much more halting progress. That has caught the Fed’s attention, especially given signs that the broader economy is holding up.“Core inflation had not shown a sustained easing since the beginning of the year,” Fed officials noted at the meeting, according to the minutes, and they “generally” noted that consumer spending had been “stronger than expected.” Officials reported that they were hearing a range of reports from businesses, as some saw weaker economic conditions and others reported “greater-than-expected strength.”The details of recent inflation data were also disquieting for some at the Fed. Officials noted that price increases for goods — physical purchases like furniture or clothing — were moderating, but less quickly than expected in recent months.While rent inflation was expected to continue to cool down and help to lower overall inflation, “a few” officials were worried that it would come down less decisively than hoped amid low for-sale housing inventory and “less-than-expected deceleration” recently in rents for leases signed by new tenants. “Some” Fed officials noted that other service prices “had shown few signs of slowing in the past few months.”Since the Fed’s meeting, officials have continued to signal that further rate increases are expected. Jerome H. Powell, the Fed chair, said during an appearance last week in Madrid that he would expect to continue with a slower pace of interest rate increases — but he did not rule out that officials could return to back-to-back rate moves.“We did take one meeting where we didn’t move, so that’s in a way a moderation of the pace,” he explained. “So I would expect something like that to continue, assuming the economy evolves about as expected.”The question for investors is what would prod the Fed to return toward a more aggressive path for rate increases — or, on the other hand, what would cause officials to hold off on future rate moves.Policymakers have been clear that the path forward for interest rate increases could change depending on what happens with the economy. If inflation is showing signs of sticking around, the job market is unexpectedly strong and consumer spending continues to chug along, that might suggest that it will take even higher interest rates to cool down household and business spending to a point where companies are forced to stop raising prices so much.If, on the other hand, inflation is coming down quickly, the job market is cooling and consumers are pulling back sharply, the Fed could feel more comfort in holding off on future rate increases.For now, investors expect the Fed to raise interest rates at its July 25-26 meeting. And economists will closely watch fresh job market data set for release on Friday for the latest evidence of how the economy is evolving. More

  • 100 Shares149 Views

    in Economy

    Inflation Has Eased, but Economists Are Still Worried

    by

    Inflation has come down from its 2022 heights, but economists are worried about its stubbornness.Inflation is beginning to abate meaningfully for American consumers. Gas is cheaper, eggs cost roughly half as much as they did in January and prices are no longer climbing as rapidly across a wide array of products.But at least one person has yet to express relief: Jerome H. Powell, the chair of the Federal Reserve.The Fed has spent the past 15 months locked in an aggressive war against inflation, raising interest rates above 5 percent in an attempt to get price increases back down to a more normal pace. Last week its officials announced that they were skipping a rate increase in June, giving themselves more time to see how the already enacted changes are playing out across the economy.But Mr. Powell emphasized that it was too early to declare victory in the battle against rapid price increases.The reason: While less expensive gas and slower grocery price adjustments have helped overall inflation to fall from its four-decade peak last summer, food and fuel costs tend to jump around a lot. That obscures underlying trends. And a measure of “core” inflation that strips out food and fuel is showing surprising staying power, as a range of purchases from dental care and hairstyling to education and car insurance continue to climb quickly in price.Last week, Fed officials sharply marked up their forecast of how high core inflation would be at the end of 2023. They now see it at 3.9 percent, higher than the 3.6 percent they predicted in March and nearly twice their 2 percent inflation target.The economic picture, in short, is playing out on something of a split screen. While the steepest price increases appear to be over for consumers — a relief for many, and a development that President Biden and his advisers have celebrated — Fed policymakers and many outside economists see continued reasons for concern. Between the subtle signs that inflation could stick around and the surprising resilience of the American economy, they believe that central bankers might need to do more to cool growth and rein in demand to prevent unusually elevated price increases from becoming permanent.“Big picture: We are making progress, but the progress is slower than expected,” said Kristin J. Forbes, a Massachusetts Institute of Technology economist and a former Bank of England policymaker. “Inflation is somewhat more stubborn than we had hoped.”A fresh Consumer Price Index inflation report last week showed that inflation continued to moderate sharply on an overall basis in May. That measure helps to feed into the Fed’s preferred measure, the Personal Consumption Expenditures index, which it uses to define its 2 percent target. The fresh P.C.E. figures will be released on June 30.White House officials, who have spent months on the defensive about the role that pandemic spending under Mr. Biden played in stoking demand and price increases, have greeted the recent cooling in inflation enthusiastically.“We have seen a very large reduction in inflation, by more than 50 percent,” Lael Brainard, the director of the White House National Economic Council, said in an interview. She added that the current trajectory on inflation offered reasons for optimism that it could return back to normal fairly quickly as the economy slowed, and expressed hope that crushing it would not necessarily require a big jump in unemployment — something that has historically accompanied the Fed’s campaigns to wrangle inflation.“The employment picture is very sustainable,” she said.But many economists are less sanguine. That’s partly because most of the factors that have helped inflation to fall so far have been widely anticipated, sort of the low-hanging fruit of disinflation.Supply chains were roiled by the pandemic and have since healed, allowing goods price increases to slow. A pop in oil prices tied to the war in Ukraine has faded.And there may be more to come: Rents jumped starting in 2021 as people moved out on their own or relocated amid the pandemic. They have since cooled as landlords found that renter demand was not strong enough to bear ever-higher prices, and the moderation is slowly feeding into official inflation data.

    .dw-chart-subhed {
    line-height: 1;
    margin-bottom: 6px;
    font-family: nyt-franklin;
    color: #121212;
    font-size: 15px;
    font-weight: 700;
    }

    Year-over-year percentage change in the Personal Consumption Expenditures index
    Source: Bureau of Economic AnalysisBy The New York TimesWhat linger are relatively rapid price increases in services outside of housing. That’s a broad category, and it includes purchases that tend to be labor-intensive, like hospital care, school tuition and sports tickets. Those prices tend to rise when wages climb, both because employers try to cover their higher costs and because consumers who are earning more have the ability to pay more without pulling back.“The big action is behind us,” said Olivier Blanchard, a former International Monetary Fund chief economist who is now at the Peterson Institute. “What remains is the pressure on wages.”

    .dw-chart-subhed {
    line-height: 1;
    margin-bottom: 6px;
    font-family: nyt-franklin;
    color: #121212;
    font-size: 15px;
    font-weight: 700;
    }

    Year-over-year percent change in the Personal Consumption Expenditures index by category
    Source: Bureau of Economic AnalysisBy The New York TimesDuring a news conference last week, Mr. Powell said that in the measure of inflation that excluded food and energy “you just aren’t seeing a lot of progress,” emphasizing that “getting wage inflation back to a level that is sustainable” could be an important part of lowering the remaining price increases.There are early signs that a labor market slowdown is underway. The Employment Cost Index measure of wages, which the Fed watches closely, is climbing much more rapidly than before the pandemic but has slowed from its mid-2022 peak. A measure of average hourly earnings has come down even more notably. And jobless claims have climbed in recent weeks.But hiring has remained robust, and the unemployment rate low — which is why economists are trying to figure out if the economy is cooling enough to guarantee that inflation will return fully to normal.Cylus Scarbrough, 42, has witnessed both features of today’s economy: fast wage growth and rapid inflation. Mr. Scarbrough works as an analyst for a homebuilder in Sacramento, and he said his skills were in such high demand that he could rapidly get a new job if he wanted. He got a 33 percent raise when he joined the company two years ago, and his pay has climbed more since.Cylus Scarbrough of Sacramento said he felt inflation was not eating into his budget the way it had before. “I don’t think about it every day,” he said.Rozette Halvorson for The New York TimesEven so, he’s racking up credit card debt because of higher inflation and because he and his family spend more than they used to before the pandemic. They have gone to Disneyland twice in the past six months and eat out more regularly.“It’s something about: You only live once,” he explained.He said he felt OK about spending beyond his budget, because he bought a house just at the start of the pandemic and now has about $100,000 in equity. In fact, he is not even worrying about inflation as much these days — it was much more salient to him when gas prices were rising quickly.“That was the time when I really felt like inflation was eating into our budget,” Mr. Scarbrough said. “I feel more comfortable with it now. I don’t think about it every day.”Fed officials are not yet comfortable, and they may do more to tame price increases. Officials predicted last week that they would raise interest rates to 5.6 percent this year, making two more quarter-point rate moves that would push rates to their highest level since 2000.Investors doubt that will happen. Given the recent cooling in inflation and signs that the job market is beginning to crack, they expect one more rate increase in July — and then outright rate cuts by early next year. But if that bet is wrong, the next phase of the fight against inflation could be the more painful one.As higher borrowing costs prod consumers and firms to pull back, they are expected to translate into less hiring and fewer job opportunities for people like Mr. Scarbrough. The slowdown might leave some people out of work altogether.Fed policymakers estimated that joblessness will jump to 4.5 percent by the end of next year — up somewhat from 3.7 percent now, but historically pretty low. But Mr. Blanchard thinks that the jobless rate might need to rise by one percentage point “and probably more.”Jason Furman, a Harvard economist, said he thought the unemployment rate could go even higher. While it is not his forecast, he said that in a bad scenario it was “possible” that it would take something like 10 percent unemployment for inflation to return totally to normal. That’s how high joblessness jumped at the worst point in the 2009 recession, and inflation came down by about two percentage points, he noted.In any case, Mr. Furman cautioned against jumping to early conclusions about the path ahead for inflation based on progress so far.“People have been so crazily premature to keep declaring victory on inflation,” he said. More

  • 125 Shares189 Views

    in Economy

    U.S. Economy’s Staying Power Poses Big Questions for the Fed

    by

    The Federal Reserve has been trying to slow growth without tanking it. Now, officials must ask if inflation can cool amid signs of resilience.Employers are hiring rapidly. Home prices are rising nationally after months of decline. Consumer spending climbed more than expected in a recent data release.America’s economy is not experiencing the drastic slowdown that many analysts had expected in light of the Federal Reserve’s 15-month, often aggressive campaign to hit the brakes on growth and bring rapid inflation under control. And that surprising resilience could be either good or bad news.The economy’s staying power could mean that the Fed will be able to wrangle inflation gently, slowing down price increases without tipping America into any sort of recession. But if companies can continue raising their prices without losing customers amid solid demand, it could keep inflation too hot — forcing consumers to pay more for hotels, food and child care and forcing the Fed to do even more to restrain growth.Policymakers may need time to figure out which scenario is more likely, so that they can avoid either overreacting and causing unnecessary economic pain or underreacting and allowing rapid inflation to become permanent.Given that, investors have been betting that Fed officials will skip a rate increase at their meeting on Tuesday and Wednesday before lifting them again in July, proceeding cautiously while emphasizing that pausing does not mean quitting — and that they remain determined to bring prices under control. But even that expectation is increasingly shaky: Markets have spent this week nudging up the probability that the Fed might raise rates at this month’s meeting.In short, the mixed economic signals could make Fed policy discussions fraught in the months ahead. Here’s where things stand.Interest rates are much higher.Interest rates are above 5 percent, their highest level since 2007.

    Source: Federal ReserveBy The New York TimesAfter sharply adjusting policy over the past 15 months, key officials including Jerome H. Powell, the Fed chair, and Philip Jefferson, President Biden’s pick to be the next Fed vice chair, have hinted that central bankers could pause to allow themselves time to judge how the increases are affecting the economy.But that assessment remains a complex one. Even some parts of the economy that typically slow when the Fed raises rates are demonstrating a surprising ability to withstand today’s interest rates.“It’s a very complicated, convoluted picture depending on which data points you are looking at,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank, noting that overall growth figures like gross domestic product have slowed — but other key numbers are holding up.House prices are wiggling.Higher interest rates can take months or even years to have their full effect, but they should theoretically work pretty quickly to begin to slow down the car and housing markets, both of which revolve around big purchases made with borrowed cash.That story has been complicated this time. Car buying has slowed since the Fed started raising rates, but the auto market has been so undersupplied in recent years — thanks in large part to pandemic-tied supply chain problems — that the cool-down has been a bumpy one. Housing has also perplexed some economists.

    Note: Data is seasonally adjusted.Source: S&P CoreLogic Case-Shiller Index, via
    S&P Global IntelligenceBy The New York TimesThe housing market weakened markedly last year as mortgage rates soared. But rates have recently stabilized, and home prices have ticked back up amid low inventory. House prices do not count directly in inflation, but their turnaround is a sign that it’s taking a lot to sustainably cool a hot economy.Job signals are confusing.Fed officials are also watching for signs that their rate increases are trickling through the economy to slow the job market: As it costs more to fund expansions and as consumer demand slows, companies should pull back on hiring. Amid less competition for workers, wage growth should moderate and unemployment should rise.Some signs suggest that the chain reaction has begun. Initial claims for unemployment insurance jumped to the highest level since October 2021 last week, a report on Thursday showed. People are also working fewer hours per week at private employers, which suggests bosses aren’t trying to eke so much out of existing staff.

    Notes: Data is seasonally adjusted and includes hours worked by full- and part-time private sector employees.Source: Bureau of Labor StatisticsBy The New York TimesBut other signals have been more halting. Job openings had come down, but edged back up in April. Wages have been climbing less swiftly for lower-income workers, but gains remain abnormally rapid. The jobless rate climbed to 3.7 percent in May from 3.4 percent, but even that was still well shy of the 4.5 percent that Fed officials expected it to hit by the end of 2023 in their latest economic forecasts. Officials will release fresh projections next week.

    Source: Bureau of Labor StatisticsBy The New York TimesAnd by some measures, the labor market is still chugging. Hiring remains particularly strong.“Everyone talks as if the economy moves in one straight line,” said Nela Richardson, chief economist at ADP. “In actuality, it’s lumpy.”Price increases are stubborn.Still, inflation itself may be the biggest wild card that could shape the Fed’s plans this month and over this summer. Officials forecast in March that annual inflation as measured by the Personal Consumption Expenditures index would retreat to 3.3 percent by the end of the year.That pullback is gradually happening. Inflation stood at 4.4 percent as of April, down from 7 percent last summer but still more than double the Fed’s 2 percent goal.

    .dw-chart-subhed {
    line-height: 1;
    margin-bottom: 6px;
    font-family: nyt-franklin;
    color: #121212;
    font-size: 15px;
    font-weight: 700;
    }

    Year-over-year percentage change in the Personal Consumption Expenditures index
    Source: Bureau of Economic AnalysisBy The New York TimesOfficials will receive a related and more up-to-date inflation reading for May — the Consumer Price Index — on the first day of their meeting next week.Economists expect substantial cooling, which could give officials confidence in pausing rates. But if those forecasts are foiled, it could make for an even more heated debate about what comes next. More

  • 125 Shares119 Views

    in Economy

    Companies Push Prices Higher, Protecting Profits but Adding to Inflation

    by

    Corporate profits have been bolstered by higher prices even as some of the costs of doing business have fallen in recent months.The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip.Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.As a result, some economists warn, policymakers at the Federal Reserve may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” Albert Edwards, a global strategist at Société Générale, said, referring to profit margins, a measure of how much businesses earn from every dollar of sales.PepsiCo, the snacks and beverage maker, has become a prime example of how large corporations have countered increased costs, and then some.Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices by enough to buffer further cost pressures in 2023. At the end of April, the company reported that it had raised the average price across its products by 16 percent in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.“I don’t think our margins are going to deteriorate at all,” Mr. Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”The bags of Doritos, cartons of Tropicana orange juice and bottles of Gatorade drinks sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.PepsiCo is not alone in continuing to raise prices. Other companies that sell consumer goods have also done well.The average company in the S&P 500 stock index increased its net profit margin from the end of last year, according to FactSet, a data and research firm, countering the expectations of Wall Street analysts that profit margins would decline slightly. And while margins are below their peak in 2021, analysts are forecasting that they will keep expanding in the second half of the year.For much of the past two years, most companies “had a perfectly good excuse to go ahead and raise prices,” said Samuel Rines, an economist and the managing director of Corbu, a research firm that serves hedge funds and other investors. “Everybody knew that the war in Ukraine was inflationary, that grain prices were going up, blah, blah, blah. And they just took advantage of that.”But those go-to rationales for elevating prices, he added, are now receding.The Producer Price Index, which measures the prices businesses pay for goods and services before they are sold to consumers, reached a high of 11.7 percent last spring. That rate has plunged to 2.3 percent for the 12 months through April.The Consumer Price Index, which tracks the prices of household expenditures on everything from eggs to rent, has also been falling, but at a much slower rate. In April, it dropped to 4.93 percent, from a high of 9.06 percent in June 2022. The price of carbonated drinks rose nearly 12 percent in April, over the previous 12 months.“Inflation is going to stay much higher than it needs to be, because companies are being greedy,” Mr. Edwards of Société Générale said.But analysts who distrust that explanation said there were other reasons consumer prices remained high. Since inflation spiked in the spring of 2021, some economists have made the case that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise trips — was left unsated because of lockdowns and constrained supply chains, driving prices higher.David Beckworth, a senior research fellow at the right-leaning Mercatus Center at George Mason University and a former economist for the Treasury Department, said he was skeptical that the rapid pace of price increases was “profit-led.”Corporations had some degree of cover for raising prices as consumers were peppered with news about imbalances in the economy. Yet Mr. Beckworth and others contend that those higher prices wouldn’t have been possible if people weren’t willing or able to spend more. In this analysis, stimulus payments from the government, investment gains, pay raises and the refinancing of mortgages at very low interest rates play a larger role in higher prices than corporate profit seeking.“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Mr. Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”Mr. Edwards acknowledged that government stimulus measures during the pandemic had an effect. In his eyes, this aid meant that average consumers weren’t “beaten up enough” financially to resist higher prices that might otherwise make them flinch. And, he added, this dynamic has also put the weight of inflation on poorer households “while richer ones won’t feel it as much.”The top 20 percent of households by income typically account for about 40 percent of total consumer spending. Overall spending on recreational experiences and luxuries appears to have peaked, according to credit card data from large banks, but remains robust enough for firms to keep charging more. Major cruise lines, including Royal Caribbean, have continued lifting prices as demand for cruises has increased going into the summer.Many people who are not at the top of the income bracket have had to trade down to cheaper products. As a result, several companies that cater to a broad customer base have fared better than expected, as well.McDonald’s reported that its sales increased by an average of 12.6 percent per store for the three months through March, compared with the same period last year. About 4.2 percent of that growth has come from increased traffic and 8.4 percent from higher menu prices.The company attributed the recent menu price increases to higher expenses for labor, transportation and meat. Several consumer groups have responded by pointing out that recent upticks in the cost of transportation and labor have eased.A representative for the company said in an email that the company’s strong results were not just a result of price increases but also “strong consumer demand for McDonald’s around the world.”Other corporations have found that fewer sales at higher prices have still helped them earn bigger profits: a dynamic that Mr. Rines of Corbu has coined “price over volume.”Colgate-Palmolive, which in addition to commanding a roughly 40 percent share of the global toothpaste market, also sells kitchen soap and other goods, had a standout first quarter. Its operating profit for the year through March rose 6 percent from the same period a year earlier — the result of a 12 percent increase in prices even as volume declined by 2 percent.The recent bonanza for corporate profits, however, may soon start to fizzle.Research from Glenmede Investment Management indicates there are signs that more consumers are cutting back on pricier purchases. The financial services firm estimates that households in the bottom fourth by income will exhaust whatever is collectively left of their pandemic-era savings sometime this summer.Some companies are beginning to find resistance from more price-sensitive customers. Dollar Tree reported rising sales but falling margins, as lower-income customers who tend to shop there searched for deals. Shares in the company plunged on Thursday as it cut back its profit expectations for the rest of the year. Even PepsiCo and McDonald’s have recently taken hits to their share prices as traders fear that they may not be able to keep increasing their profits.For now, though, investors appear to be relieved that corporations did as well as they did in the first quarter, which has helped keep stock prices from falling broadly.Before large companies began reporting how they did in the first three months of the year, the consensus among analysts was that earnings at companies in the S&P 500 would fall roughly 7 percent compared with the same period in 2022. Instead, according to data from FactSet, earnings are expected to have fallen around 2 percent once all the results are in.Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, wrote in a note that the latest quarterly reports “once again showed corporate America’s ability to preserve margins.” Her team raised overall earnings growth expectations for the rest of the year, and 2024. More

  • 100 Shares129 Views

    in Economy

    Consumer Spending Rose More Than Expected in April

    by

    New data on spending and income suggest that the economy remains robust despite the Federal Reserve’s interest rate increases.Americans’ income and spending both rose in April, a sign of economic resilience amid rising prices and warnings of a possible recession.Consumer spending increased 0.8 percent in April, the Commerce Department said Friday. The uptick followed a two-month slowdown in spending and exceeded forecasters’ expectations, as Americans shelled out for cars, restaurant meals, movie tickets and other goods and services.After-tax income rose 0.4 percent, fueled by a strong job market that continues to push up wages and bring more people into the work force. Data from the Labor Department this month showed that Americans in their prime working years were employed in April at the highest rate in more than two decades.Separate data released by the Commerce Department on Friday showed that a key measure of business investment also picked up in April, a sign that corporate executives aren’t expecting a major slump in demand in coming months.Consumers’ resilience is a mixed blessing for officials at the Federal Reserve, who worry that robust spending is contributing to inflation, but who also don’t want it to slow so rapidly that the economy falls into a recession. The gradual slowdown in spending seen in recent months is broadly consistent with the “soft landing” scenario that policymakers are aiming for, but they have been wary of declaring victory too soon — a concern that April’s data, which showed persistent inflation alongside stronger spending, could underscore.“The odds of a recession dropped again,” wrote Robert Frick, corporate economist with Navy Federal Credit Union, in a note to clients on Friday. “The one problem from the report is inflation remains stubbornly high, and may tempt the Fed to raise the federal funds rate even more, when a pause was on the table,” he added, referring to the upcoming meeting of policymakers in June.It is unclear how long consumers can continue to prop up the economic recovery. Savings that some households built up in the pandemic have begun to dwindle, and there are signs companies are beginning to pull back on hiring. The standoff over the debt limit could further sap the economy’s momentum, although there were signs on Thursday evening that leaders in Washington were closing in on a deal to avert a default. More

  • 113 Shares129 Views

    in Economy

    Inflation Persists and Car Prices Are a Big Reason

    by

    Prices of new and used vehicles were supposed to recede quickly as supply chain problems dissipated. The market had other ideas.‌Car prices soared after the coronavirus lockdowns, and two years into the United States’ worst inflationary episode since the 1980s, the industry demonstrates that getting back to normal will be a long and lurching ride.In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher. Economists had hoped that prices might ease as supply chains healed and the Federal Reserve’s interest rate increases deterred borrowers.Instead, prices for new cars have risen further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used car prices helped to lower overall inflation late last year, but rebounded in April as short supply collided with a surge in demand.Echoes from the industry’s pandemic disruptions are reverberating through the economy even though the emergency has formally ended, and illustrate why the Fed’s fight to quash inflation could be a long one as consumers continued spending despite higher prices.A Wild Ride for Car PricesUsed car prices have been volatile, while new car costs have continued to climb, adding to overall inflation.

    Source: Bureau of Labor Statistics By The New York Times“Inflation is not going to be a smooth path downward — there are going to be bumps along the road,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “There are so many idiosyncratic factors at play right now, and I think some of that has to do with demand post-pandemic.”Elevated car prices have proved uncomfortably sticky. Used car prices have declined, but in a more muted — and volatile — fashion than economists had anticipated. And new cars have continued to get more expensive this year as manufacturers strive to maintain the margins established in 2021.“The big question now is: Are companies going to start competing with one another on price?” Ms. Uruci asked.But that’s a difficult question to answer, because the automotive market has drastically changed. To understand the situation, it’s useful to examine how the auto industry worked before.“Going into the pandemic, the dynamic in the automobile business was this idea that retail profitability was under constant pressure, driven by the internet,” said Pat Ryan, the chief executive of CoPilot, a car shopping app that monitors prices across about 40,000 dealerships.Automakers produced more cars than the marketplace demanded, offering incentives to clear inventory and compete with lower-cost imports. Dealers made their profits on volume and financing, often resulting in customer complaints of excess fees.As the coronavirus spread, factories shut down. Even when they reopened, semiconductors remained scarce. Manufacturers allocated chips to their highest-priced models — trucks and sport utility vehicles — offsetting lower volume with higher profits on each sale. About five million cars that normally would have been produced never were, Mr. Ryan said.Dealers got in on the action, charging thousands of dollars above list price — especially as stimulus programs rolled out, and consumers sought to upgrade their vehicles or buy new ones to escape cities. A study by the economist Michael Havlin, published by the Bureau of Labor Statistics, found that dealer markups accounted for 35 percent to 62 percent of total new-vehicle consumer inflation from 2019 to 2022.There were downsides to the lower sales volumes; dealerships also make money on service packages years after cars drive off the lot. But on balance, “it was the best of times for car dealers, for sure,” Mr. Ryan said.It was the worst of times, however, for anyone who suddenly needed a car.Hailey Cote with her recently purchased Toyota Corolla.Ross Mantle for The New York TimesThat’s the position that Hailey Cote of Pittsburgh found herself in last summer. After tiring of low-wage jobs on farms and in restaurants, she built a business cleaning houses for $25 an hour. When her 2005 Jeep Grand Cherokee broke down, she knew she had to find a replacement quickly to ferry cleaning gear to each job and get to school, where she’s pursuing a degree in counseling.At that point, the used cars she could find were only a few thousand dollars less than the cheapest new cars, so she went with a 2022 base model Toyota Corolla. Her loan payment is about $500 a month. Insurance, which has also become more expensive, is another $200. Including gas and maintenance, Ms. Cote’s transportation cost is almost as much as her rent, leaving nothing for savings or recreation.“I think it’s the basic necessities that are really the worst,” Ms. Cote, 29, said. “Food’s gone up a bit, but the cost of housing, health care and cars is pretty brutal.”The car price frenzy began to ease in the second half of 2022, as more vehicles started rolling off assembly lines. But the supply has risen only gradually. Automakers, loath to relinquish profits enabled by scarcity, started talking about exercising “discipline” in their production targets.“During this two-year period, auto dealers and auto manufacturers discovered that a low-volume, higher-price model was actually a very profitable model,” Tom Barkin, the president of the Federal Reserve Bank of Richmond, said in an interview.Car Dealers Reap Big Profits in Inflation EraCar companies have been increasing prices by more than their input costs have climbed, leading to big profits on new vehicles.

    .dw-chart-subhed {
    line-height: 1;
    margin-bottom: 6px;
    font-family: nyt-franklin;
    color: #121212;
    font-size: 15px;
    font-weight: 700;
    }

    Percent markups for publicly traded dealerships
    Source: Michael Havlin (Bureau of Labor Statistics)By The New York Times“The experience of higher prices, and the ability to move prices, does broaden the perspectives of business people in terms of what their options are,” he said. “It’s attractive if you can do it.”One way the automakers tried to buoy prices was jettisoning cheaper models, like the Chevrolet Spark and Volkswagen Passat. Responding to federal subsidies, car companies rolled out electric vehicles, but that didn’t help to bring prices down — they started with luxury versions, like the $42,995 Mustang Mach-E.And there have been added supply constraints. The generation of cars that would typically be coming off three-year leases is smaller than usual. Those who leased cars in the spring of 2020 have an incentive to buy them at the prices that were locked in before everything became more expensive.On top of that, some rental car companies are aggressively restocking their fleets after being starved for several years, leading dealership groups like Sonic Automotive to complain on earnings calls that they’re being outcompeted at auctions.“There are so many sources of used vehicles that just dried up over the last few years,” said Satyan Merchant, a senior vice president for financial services at TransUnion, a credit monitoring company. “And it all has this downstream effect.”The Fed has been raising interest rates sharply to slow demand — including for cars — and cool price increases. But during the adjustment period, that is making it even tougher for many Americans to afford a vehicle. According to TransUnion, the average monthly payment for a new car rose to $736 in the first quarter of 2023, from $585 two years before. Used cars average $523 per month, up $110 over the same period.Prices for Cars of All Ages Are Above Prepandemic LevelsA new car will run you about $51,000 on average – about 30 percent more than in January 2020. 

    Source: CoPilotBy The New York TimesCars are now a bifurcated market: Demand remains strong on the high end, where wealthy buyers with excess savings from the past two-plus years are able to absorb higher interest rates, or simply pay cash. Some are only now receiving vehicles they ordered in 2022 at inflated prices.Competition for vehicles is also fierce on the low end, since people with thin financial cushions and in-person jobs can’t afford to forgo transportation, which in most of the country is synonymous with a car. The job market has remained strong, especially for in-person jobs in fields like hospitality and health care, so more people have workplaces to get to.And many people in between, who might switch cars every few years, are waiting for prices to fall.“What we’ve seen is the disappearance of the middle,” said Scott Kunes, chief operating officer of a dealership group in the Midwest. He faults the automakers for abandoning cheaper, smaller, basic cars that people need just to get around, especially as interest rates put fancier versions beyond reach. “It doesn’t make any sense to me at all.”The situation may start to resolve itself soon. Wholesale car prices have begun to fall, and carmakers are offering more incentives. Kelley Blue Book data shows that average prices have fallen below list for the past two months, which Jonathan Smoke, chief economist at Cox Automotive, said signaled that demand was easing. Prices have come down in recent months for electric cars — the fastest-growing segment of new car sales, though a small portion of the overall market.Recent history has shown, however, that pricing trajectories are rarely linear. Adam Jonas, an auto industry analyst with Morgan Stanley, said that over the short to medium term, more inventory was the only answer.“Even though the statements from the Japanese and the Koreans are that the chip shortage is ending, it takes many months to spool it up,” he said. “Dealers should prepare for a tight summer.”Jack Ewing More