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    Companies Like Afterpay and Affirm May Put Americans At Risk For ‘Phantom Debt’

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    Buying mattresses, clothes and other goods on installment plans has propped up spending, but economists worry that such loans could put some people at risk.“Buy now, pay later” loans are helping to fuel a record-setting holiday shopping season. Economists worry they could also be masking and exacerbating cracks in Americans’ financial well-being.The loans, which allow consumers to pay for purchases in installments, often interest-free, have soared in popularity because of high prices and interest rates. Retailers have used them to attract customers and to get people to spend more.But such loans may be encouraging younger and lower-income Americans to take on too much debt, according to consumer groups and some lawmakers. And because such loans aren’t routinely reported to credit bureaus or captured in public data, they could also represent a hidden source of risk to the financial system.“The more I dig into it, the more concerned I am,” said Tim Quinlan, a Wells Fargo economist who recently published a report that described pay-later loans as “phantom debt.”Traditional measures of consumer credit indicate that U.S. household finances overall are relatively healthy. But, Mr. Quinlan said, “if those are missing the fastest-growing piece of the market, then those reassurances aren’t worth a darn.”Estimates of the size of this market vary widely. Mr. Quinlan thinks that spending through pay-later options was about $46 billion this year. That is small when compared with the more than $3 trillion that Americans put on their credit cards last year.But such loans — offered by companies like Klarna, Affirm, Afterpay and PayPal — have climbed fast at a moment when the finances of some Americans are showing early signs of strain.Credit card borrowing is at a record high in dollar terms — though not as a share of income — and delinquencies, though low by historical standards, are rising. That stress is especially evident among younger adults.People in their 20s and 30s are by far the biggest users of pay-later loans, according to the Federal Reserve Bank of New York. That could be both a sign of financial problems — young people may be using pay-later loans after maxing out credit cards — and a cause of it by encouraging them to spend excessively.Liz Cisneros, a 23-year-old college student in Chicago who works part time at Home Depot, said she was surprised by the ease of pay-later programs. During the pandemic, she saw influencers on TikTok promoting the loans, and a friend said they helped her buy designer shoes.Ms. Cisneros started using them to buy clothes, shoes and Sephora beauty products. She often had multiple loans at a time. She realized she was overspending when she didn’t have enough money while in a grocery checkout line. A pay-later company had withdrawn funds from her bank account that morning, and she had lost track of her payment schedule.“It’s easy when you keep continually clicking and clicking and clicking, and then it’s not,” she said, referring to when she realizes she has spent too much.Ms. Cisneros said the problem was particularly intense around Christmas, and this year she was not shopping for the holiday so she could pay off her debts.Pay-later loans became available in the United States years ago, but they took off during the pandemic when online shopping surged.The products are somewhat similar to the layaway programs offered decades earlier by retailers. Online shoppers can choose from pay-later options at checkout or on the apps of pay-later companies. The loans are also available at some physical stores; Affirm said on Tuesday that it had started offering pay-later loans at the self-checkout counters at Walmart stores.The most common loans require buyers to pay a quarter of the purchase price upfront with the rest usually paid in three installments over six weeks. Such loans are typically interest-free, though users sometimes end up owing fees. Pay-later companies make most of their money by charging fees to retailers.Some lenders also offer interest-bearing loans with repayment terms that can last a few months to more than a year. Pay-later companies say their products are better for borrowers than credit cards or payday loans. They say that by offering shorter loans, they can better assess borrowers’ ability to repay.“We’re able to identify and extend credit to consumers who have the ability and willingness to repay above that of revolving credit accounts,” Michael Linford, Affirm’s chief financial officer, said in an interview.In its most recent quarter, 2.4 percent of Affirm’s loans were delinquent by 30 days or longer, down from 2.7 percent a year earlier. Those numbers exclude its four-payment loans.Briana Gordley, who works on consumer finance issues for a progressive policy organization, learned about pay-later firms in college from friends, and still uses them occasionally for larger purchases.Montinique Monroe for The New York TimesThe service makes the most sense for certain purchases, like buying an expensive sweater that will last many years, said the chief executive of Klarna, Sebastian Siemiatkowski.He said pay later probably made less sense for more frequent purchases like groceries, though Klarna and other companies do make their loans available at some grocery stores.Mr. Siemiatkowski acknowledged that people could misuse his company’s loans.“Obviously it’s still credit, and so you’re going to find a subset of individuals who unfortunately are using it in not the way intended,” said Mr. Siemiatkowski, who founded Klarna in 2005. He said the company tried to identify those users and deny them loans or impose stricter terms on them.Klarna, which is based in Stockholm, says its global default rates are less than 1 percent. In the United States, more than a third of customers repay loans early.Kelsey Greco made her first pay-later purchase about four years ago to buy a mattress. Paying $1,200 in cash would have been difficult, and putting the purchase on a credit card seemed unwise. So she got a 12-month, interest-free loan from Affirm.Since then, Ms. Greco, 30, has used Affirm regularly, including for a Dyson hair tool and car brakes. Some of the loans charged interest, but she said that even then she preferred this form of borrowing because it was clear how much she would pay and when.“With a credit card, you can swipe it all day long and be like, ‘Wait, what did I just get myself into?’” Ms. Greco, a Denver resident, said. “Whereas with Affirm, it’s giving you these clear-cut numbers where you can see, ‘OK, this makes sense’ or ‘This doesn’t make sense.’”Ms. Greco, who was introduced to The New York Times by Affirm, said pay-later loans helped her avoid credit card debt, with which she previously had trouble.But not all consumers use pay-later options carefully. A report from the Consumer Finance Protection Bureau this year found that nearly 43 percent of pay-later users had overdrawn a bank account in the previous 12 months, compared with 17 percent of nonusers. “This is just a more vulnerable portion of the population,” said Ed deHaan, a researcher at Stanford University.In a paper published last year, Mr. deHaan and three other scholars found that within a month of first using pay-later loans, people became more likely to experience overdrafts and to start accruing credit card late fees.Financial advisers who work with low-income Americans say more clients are using pay-later loans.Barbara L. Martinez, a financial counselor in Chicago who works at Heartland Alliance, a nonprofit group, said many of her clients used cash advances to cover pay-later loans. When paychecks arrive, they don’t have enough to cover bills, forcing them to turn to more pay-later loans.“It is not that the product is bad,” she added, but “it can get out of control really fast and cause a lot of damage that could be prevented.”Barbara L. Martinez, a financial counselor in Chicago who works with low-income families, meeting with a colleague about an upcoming workshop for people wanting to learn more about financial stability.Jamie Kelter Davis for The New York TimesBriana Gordley learned about pay-later products in college. She was working part time and couldn’t get approved for a credit card, but pay-later providers were eager to extend her credit. She started falling behind when her work hours were reduced. Eventually, family and friends helped her repay the debts.Ms. Gordley, who testified about her experience last year in a listening session hosted by the Senate, now works on consumer finance issues for Texas Appleseed, a progressive policy organization. She said pay-later loans could be an important source of credit for communities that lacked access to traditional loans. She still uses them occasionally for larger purchases.But she said companies and regulators needed to make sure that borrowers could afford the debt they were taking on. “If we’re going to create these products and build out these systems for people, we also just have to have some checks and balances in place.”The Truth in Lending Act of 1968 requires credit card companies and other lenders to disclose interest rates and fees and provides borrowers with various protections, including the ability to dispute charges. But the act applies only to loans with more than four payment installments, effectively excluding many pay-later loans.Many such loans also aren’t reported to credit agencies. As a result, consumers could have multiple loans with Klarna, Afterpay and Affirm without the companies knowing about the other debts.“It’s a huge blind spot right now, and we all know that,” said Liz Pagel, a senior vice president at TransUnion who oversees the company’s consumer lending business.TransUnion and other major credit bureaus and pay-later companies all say they are supportive of more reporting.But there are practical hurdles. The credit-rating system rates borrowers more highly for having longer-term loans, including longstanding credit card accounts. Each pay-later purchase qualifies as a separate loan. As a result, those loans could lower the scores of borrowers even if they repay them on time.Ms. Pagel said TransUnion had created a new reporting system for the loans. Other credit bureaus, such as Experian and Equifax, are doing the same.Pay-later firms say they are reporting certain loans, particularly ones with longer terms. But most are not reporting and won’t commit to reporting loans with just four payments.That worries economists who say they are particularly concerned about how such loans will play out when the economy weakens and workers start losing their jobs.Marco di Maggio, a Harvard Business School professor who has studied pay-later products, said that when times were tough more people would use such loans for smaller expenses and get into trouble. “You only need one more shock to push people into default.” More

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    West Hollywood Minimum Wage, Highest in U.S., Irks Merchants

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    Josiah Citrin, the owner and chef of a Santa Monica restaurant with two Michelin stars, opened a new steakhouse a few months ago off the Sunset Strip. He is already concerned about whether the restaurant can survive.The reason, Mr. Citrin said, is singular: a West Hollywood city mandate that workers be paid at least $19.08 an hour, the highest minimum wage in the country.“It’s very challenging,” Mr. Citrin, 55, said of the new minimum wage, which took effect about two weeks before he opened his doors in July. “Really, it’s almost impossible to operate.”His sentiment is widely shared among business owners in West Hollywood, a city of 35,000 known for restaurants, boutiques and progressive politics. In recent weeks, many owners have written to lawmakers, pleading for a moratorium on further increases to the minimum wage; another is scheduled for July, based on inflation. And last month, several marched to a local government building carrying signs that read, “My WeHo” and “R.I.P. Restaurants in West Hollywood.”Their sense of duress arises partly from geography. The jaggedly shaped city is bordered by Beverly Hills to the west and Los Angeles to the north, south and east. Some streets begin in Los Angeles, slice through West Hollywood and end in Beverly Hills. You can be in three cities — barring, of course, traffic — in a matter of minutes.And that means West Hollywood’s small businesses have competitors down the street with lower costs.Beyond raising the minimum wage, the West Hollywood ordinance, which the City Council approved in 2021, requires that all full-time employees receive at least 96 hours a year of paid time off for sick leave, vacation or other personal necessities, as well as 80 hours that they can take off without pay.The State of California’s hourly minimum wage is $15.50, the third highest in the nation, trailing only the District of Columbia at $17 and Washington State at $15.74. But just as each state’s minimum wage can supersede the federal minimum of $7.25 an hour, more than two dozen cities across California, including West Hollywood and several in the Bay Area, have higher minimum wages than the state, according to the Economic Policy Institute, a nonpartisan think tank.The number of workers at Charcoal Sunset restaurant in West Hollywood has fallen to 35 from around 50. The owner is wondering about his future in the city.Mark Abramson for The New York TimesIn San Francisco, it’s $18.07; in Los Angeles, $16.78.Chris Tilly, a professor at the University of California, Los Angeles, who studies labor markets and public policies that shape the workplace, said research had shown that gradual and moderate increases to the minimum wage had no significant impact on employment levels.“The claim that minimum wage increases are job-killers is overblown,” Mr. Tilly said. But “there are possible downsides,” he added. “One is that economic theory tells us an overly large increase in the minimum is bound to deter businesses from hiring.”Over the past year, workers in several California industries have seen significant pay raises due, in many instances, to wins by organized labor. Health care workers at Kaiser Permanente facilities secured a contract that includes a $25-an-hour minimum wage in the state. Fast food workers across the state will soon make a minimum wage of $20 per hour, and hotel workers have received significant pay bumps across Southern California.Until recently, West Hollywood followed the state’s minimum wage increases, which have risen every year since 2017, often by a dollar at a time. But that changed with the new ordinance, which included a series of increases.Genevieve Morrill, president of the West Hollywood Chamber of Commerce, said that while her group wanted workers to earn a living wage in an increasingly expensive part of the country, she felt that the ordinance had done more to hurt workers, who have lost hours or, in some cases, their jobs after places have shuttered.Around the time the recent wage bump took effect, Ms. Morrill helped more than 50 local businesses, including Mr. Citrin’s restaurant, write a letter to the City Council outlining their concerns. They called for a moratorium on further minimum wage increases through 2025 or until the rate aligns with the Los Angeles rate. They also asked that the city roll back the mandated paid time-off policy.West Hollywood has promoted itself as “a leader in many critical social movements.”Mark Abramson for The New York TimesA journey of mere blocks can pass through Los Angeles, West Hollywood and Beverly Hills.Mark Abramson for The New York TimesWest Hollywood, which was incorporated in 1984, was the first city in the nation to have a City Council with a majority of members who were openly gay. It has promoted itself as “a leader in many critical social movements,” including, among other things, advocacy for H.I.V. causes, affordable housing and women’s rights, according to a post on the city’s website.When you walk along Santa Monica Boulevard, which cuts through the center of this city, a bustling energy fills the sidewalks. Several residents are catching up with phone calls while out walking their dogs, and others are grabbing a latte or strolling through an art gallery. People are doing calisthenics in a park. At night, the city’s vibrant bar and restaurant scene brings a buzz.Mayor Sepi Shyne, who was sworn in this year, said businesses had long been a part of the fabric of the community.“Our businesses are also the backbone of support for workers: Lifting workers with fair pay is part of securing economic justice and a brighter future for everyone,” said Ms. Shyne, who supports the minimum wage ordinance but said she was seriously listening to resistance from the business community.Last month, the City Council, of which Ms. Shyne is a member, approved about $2.8 million in waivers, credits and marketing dollars to help the business community. The City Council, she said, has also directed staff members to get feedback from workers about the effect of paid time off.A major supporter of the ordinance was UNITE HERE Local 11, which represents 30,000 workers at hotels and restaurants across Southern California.West Hollywood has a vibrant bar and restaurant scene that brings a buzz to the city.Mark Abramson for The New York TimesSunset Plaza is a center of various businesses on the Sunset Strip in West Hollywood.Mark Abramson for The New York TimesKurt Petersen, co-president of the local, said West Hollywood was setting a standard that should be replicated across California and the country. “It has raised living standards and given workers the security of paid time off,” he said.Near the intersection of Santa Monica and La Cienega Boulevards, Paul Leonard plans to open a location for his pet grooming business, Collar & Comb. He has operated at other locations, a few blocks away in Los Angeles, since 2019. The most popular service, Mr. Leonard said, is a full-spectrum specialty groom for dogs under 20 pounds at $166.In an interview, Mr. Leonard said he was not concerned about the minimum wage because he paid his groomers at least $23 an hour.“Everything is going up, and so should wages,” he said.Steve Lococo, who has been a part of the business community for decades, said small-business owners “have not at all been heard” over the last two years in West Hollywood. He has raised prices — an average haircut, previously $150, is now $195 — and his business, B2V Salon, which he co-owns with Alberto Borrelli, has cut back to five employees from nine. At the start of the new year, Mr. Lococo said, the salon will assess staffing again.“There need to be modifications to this ordinance,” he said. “Lately, it’s just like, you feel as if you have no say as a business owner in how things are done in the city.”Paul Leonard of Collar & Comb with his dog, Lincoln. “Everything is going up,” Mr. Leonard said, “and so should wages.”Mark Abramson for The New York TimesMeanwhile, Mr. Citrin, who has run restaurants in the Los Angeles area for more than 25 years, said the staff at his West Hollywood restaurant, Charcoal Sunset, which specializes in prime cuts of meat, had fallen to 35 from around 50.At high-end restaurants like his, Mr. Citrin noted, servers often make good money — sometimes more than $50 an hour when tips are included, he said. Most nights, his West Hollywood restaurant makes revenue comparable to what his Los Angeles and Santa Monica restaurants bring in, but his overhead costs are higher in West Hollywood. For now, he said, he is unsure of his future in the city.He often wonders if it’s easier to simply focus on his restaurants elsewhere in the area.“That’s something I need to answer in the coming months,” he said. More

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    It Took 10 Years to Grow This Christmas Tree. The Price? $105

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    It Took 10 Years to Grow This Christmas Tree. The Price? $105 Dec. 18, 2023 Amid wild cost fluctuations and extreme weather conditions, a small army of workers toiled for years at Wyckoff’s Christmas Tree Farm in Belvidere, N.J. The goal? Producing this year’s crop, including this seven-foot Norway Spruce, which is sold for $105. […] More

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    Prices for Some Goods Are Actually Falling This Holiday Season

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    As inflation slows, prices for some physical goods are falling outright, which could lift consumers’ spirits.American shoppers, burned by more than two years of rapid inflation, are getting some welcome relief this holiday season: Prices on many products are falling.Toys are almost 3 percent cheaper this Christmas than last, government data shows. Sports equipment is down nearly 2 percent. Bigger-ticket items are also showing price declines: Washing machines cost 12 percent less than a year ago, for example. And eggs, whose meteoric rise in prices last winter became a prime example of the country’s inflation problem, are down 22 percent over the past year.Consumer prices, in the aggregate, are still rising, though not nearly as quickly as a year ago. Most groceries still cost more than they did a year ago. So do most services, such as restaurant meals, haircuts and trips to the dentist. And housing costs, the biggest monthly expense for most Americans, are still rising for both renters and home buyers. Overall, the price of physical goods is flat over the past year, while the price of services is up a bit more than 5 percent.Still, economists view the moderation in goods prices as an important step toward putting the high inflation of the past two and a half years more firmly in the rearview mirror. They expect it to continue: Most forecasters say prices for physical products will keep falling next year, especially prices for longer-lasting manufactured goods, where the recent declines have been largest. That should help price increases overall to ease.“We’re just kind of in the beginning of that phase, and we should continue to see downward pressure on prices in this category,” said Michelle Meyer, chief economist for Mastercard.For consumers, who have been dour about the economy despite low unemployment, falling prices on many goods could provide a psychological lift. After the rapid inflation of the past few years, a mere slowdown in price increases might not feel like much to celebrate. But seeing prices fall could be a different story — especially because some of the biggest recent declines have been in categories that consumers tend to pay the most attention to, such as gasoline. (The price of regular gas, which topped $5 a gallon nationally in June 2022, has fallen to just over $3 on average, according to AAA.)Most groceries still cost more than they did a year ago. Maansi Srivastava/The New York Times“People will key in on certain prices,” said Neale Mahoney, a Stanford University economist who recently left a role in the Biden administration. “We know that people will overweight certain things.”The price of many goods soared in 2021, fed by a surge in demand from consumers flush with pandemic relief checks and by supply chain disruptions that limited supplies of many products, especially those from overseas.Many economists initially expected a quick reversal, but instead prices kept rising. Supply chains took longer to return to normal than expected, and Russia’s invasion of Ukraine led to a spike in energy prices in 2022. At the same time, consumer demand for goods remained high, and many companies took advantage of the opportunity to push through price increases and pad their profit margins.Now, however, many of those forces are beginning to fade. Supply chains have largely returned to normal. Oil prices have fallen. Economic weakness in China and other countries has held down demand for many raw materials, which feeds through to consumer prices.Softer demand from American consumers could also be playing a role. The Federal Reserve has raised interest rates repeatedly since early last year in an effort to curb spending and control inflation. Consumers have so far proved remarkably resilient, but retailers in recent months have reported that shoppers have increasingly traded down to cheaper items or waited for sales before buying — trends that could accelerate if the economy cools further next year.“We think that the consumer is going to be looking for value, and that’s because they are very sensitive to price,” Carlos E. Alberini, chief executive of Guess, the fashion retailer, told investors last month. The company has “revisited some of the pricing structure we have in all brands,” he added.The price of services is up a bit more than 5 percent for such things as restaurant meals, haircuts and trips to the dentist.Hiroko Masuike/The New York TimesSome toy manufacturers and retailers that sell toys have also said they expect sales this season to be less robust than in years past and have leaned into advertising their products’ affordability.At many companies, price cuts have taken the form of Black Friday sales and holiday promotions that are larger for some categories of items than in past years. At Signet Jewelers, the big diamond retailer, sales fell in the third quarter, and the company recently said that it expected sales to be lower this holiday season than last year in part because of “elevated promotional activity.”“It’s been a different holiday season,” Virginia C. Drosos, Signet’s chief executive, told investors on a conference call this month. Instead of shopping early, customers are waiting to make their purchases and are looking for deals, she said.Matt Pavich, senior director of innovation and strategy for Revionics, a company that uses artificial intelligence to help retailers set prices, said companies were trying to cut prices before their competitors do.“As prices come down, there’s going to be the race to bring prices down more, get the credit for that,” he said. “We’re going to see retailers really trying to win back consumers’ trust.”Still, prices for most products remain well above where they were before the pandemic. A dozen eggs cost about 50 cents more than in February 2020. Used car prices, another prominent example of pandemic sticker shock, have fallen more than 10 percent from their peak early last year but are 37 percent above where they were in February 2020.Services prices are still climbing more quickly than before the pandemic. Some economists say that goods prices will need to fall further for overall inflation to return to the Federal Reserve’s target of 2 percent a year.“We need pretty substantial deflation, and I wouldn’t call what we’re seeing ‘substantial,’” said Wendy Edelberg, director of the Hamilton Project, an economic policy division of the Brookings Institution. “It’s not even substantial in a historical context.”Indeed, prices of durable goods fell much of the two decades that preceded the pandemic. Long-term trends such as globalization and automation have tended to push down manufacturing costs. Intense competition among retailers, especially with the rise of online shopping, meant those savings were mostly passed on to consumers.Services prices, on the other hand, rarely fall, in part because wages account for a much larger share of the cost of most services. During the decade before the pandemic, services prices gradually rose while goods prices were flat or fell, resulting in an extended period of stable, moderate inflation.Economists don’t expect to see outright deflation, in which prices fall for both goods and services. That’s a good thing: Overall price declines are generally viewed as economically dangerous, if they last.“When demand in the economy is weak, the last thing you want is someone to say, ‘I’m not going to buy that car today because it’s going to be $600 less expensive in six months,’” said Karen Dynan, an economist at Harvard.Brittany Greeson for The New York TimesThere are a few reasons. For starters, in theory, deflation could prompt consumers to hold off on spending, touching off a downward spiral. People may be unlikely to buy today what they expect to be cheaper tomorrow. Once deflation takes hold, it can be difficult to escape: Japan has been stuck in a deflationary pattern since the late 1990s.“When demand in the economy is weak, the last thing you want is someone to say, ‘I’m not going to buy that car today because it’s going to be $600 less expensive in six months,’” said Karen Dynan, an economist at Harvard.For another, companies are unlikely to raise wages in a world where they cannot charge more. And if wages are not going up — or are even going down — it will be harder for households to keep up with fixed bills, like mortgage interest payments.But while broad-based price declines are a problem, most economists view the more limited declines happening now as a sign that the economy is gradually moving past the disruptions of the pandemic.“Supply chains have basically normalized,” said Neil Dutta, head of economic research at Renaissance Macro. “Household demand behavior has basically normalized, the dollar is still pretty strong. I wouldn’t see a reason why goods prices would go higher.” More

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    Is Jerome Powell’s Fed Pulling Off a Soft Landing?

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    It’s too soon to declare victory, but the economic outlook seems sunnier than it did a year ago, and many economists are predicting a surprising win.The Federal Reserve appears to be creeping closer to an outcome that its own staff economists viewed as unlikely just six months ago: lowering inflation back to a normal range without plunging the economy into a recession.Plenty could still go wrong. But inflation has come down notably in recent months — it is running at 3.1 percent on a yearly basis, down from a 9.1 percent peak in 2022. At the same time, growth is solid, consumers are spending, and employers continue to hire.That combination has come as a surprise to economists. Many had predicted that cooling a red-hot job market with far more job openings than available workers would be a painful process. Instead, workers returned from the labor market sidelines to fill open spots, helping along a relatively painless rebalancing. At the same time, healing supply chains have helped to boost inventories and ease shortages. Goods prices have stopped pushing inflation higher, and have even begun to pull it down.The Fed is hoping for “a continuation of what we have seen, which is the labor market coming into better balance without a significant increase in unemployment, inflation coming down without a significant increase in unemployment, and growth moderating without a significant increase in unemployment,” Jerome H. Powell, the Fed chair, said Wednesday.As Fed policymakers look ahead to 2024, they are aiming squarely for a soft landing: Officials are trying to assess how long they need to keep interest rates high to ensure that inflation is fully under control without grinding economic growth to an unnecessarily painful halt. That maneuver is likely to be a delicate one, which is why Mr. Powell has been careful to avoid declaring victory prematurely.But policymakers clearly see it coming into view, based on their economic projections. The Fed chair signaled on Wednesday that rates were unlikely to rise from their 5.25 to 5.5 percent setting unless inflation stages a surprising resurgence, and central bankers predicted three rate cuts by the end of 2024 as inflation continues to cool and joblessness rises only slightly.Consumers continue to spend, and growth in the third quarter was unexpectedly hot.Tony Cenicola/The New York TimesIf they can nail that landing, Mr. Powell and his colleagues will have accomplished an enormous feat in American central banking. Fed officials have historically tipped the economy into a recession when trying to cool inflation from heights like those it reached in 2022. And after several years during which Mr. Powell has faced criticism for failing to anticipate how lasting and serious inflation would become, such a success would be likely to shape his legacy.“The Fed right now looks pretty dang good, in terms of how things are turning out,” said Michael Gapen, head of U.S. Economics at Bank of America.Respondents in a survey of market participants carried out regularly by the research firm MacroPolicy Perspectives are more optimistic about the odds of a soft landing than ever before: 74 percent said that no recession was needed to lower inflation back to the Fed’s target in a Dec. 1-7 survey, up from a low of 41 percent in September 2022.Fed staff members began to anticipate a recession after several banks blew up early this year, but stopped forecasting one in July.People were glum about the prospects for a gentle landing partly because they thought the Fed had been late to react to rapid inflation. Mr. Powell and his colleagues argued throughout 2021 that higher prices were likely to be “transitory,” even as some prominent macroeconomists warned that it might last.The Fed was forced to change course drastically as those warnings proved prescient: Inflation has now been above 2 percent for 33 straight months.Once central bankers started raising interest rates in response, they did so rapidly, pushing them from near-zero at the start of 2022 to their current range of 5.25 to 5.5 percent by July of this year. Many economists worried that slamming the brakes on the economy so abruptly would cause whiplash in the form of a recession.But the transitory call is looking somewhat better now — “transitory” just took a long time to play out.Much of the reason inflation has moderated comes down to the healing of supply chains, easing of shortages in key goods like cars, and a return to something that looks more like prepandemic spending trends in which households are buying a range of goods and services instead of just stay-at-home splurges like couches and exercise equipment.In short, the pandemic problems that the Fed had expected to prove temporary did fade. It just took years rather than months.“As a charter member of team transitory, it took a lot longer than many of us thought,” said Richard Clarida, the former Fed vice chair who served until early 2022. But, he noted, things have adjusted.Fed policies have played a role in cooling demand and keeping consumers from adjusting their expectations for future inflation, so “the Fed does deserves some credit” for that slowdown.While higher interest rates didn’t heal supply chains or convince consumers to stop buying so many sweatpants, they have helped to cool the market for key purchases like housing and cars somewhat. Without those higher borrowing costs, the economy might have grown even more strongly — giving companies the wherewithal to raise prices more drastically.Now, the question is whether inflation will continue to cool even as the economy hums along at a solid clip, or whether it will take a more marked economic slowdown to drive it down the rest of the way. The Fed itself expects growth to slow substantially next year, to 1.4 percent from 2.6 percent this year, based on fresh projections.“Certainly they’ve done very well, and better than I had anticipated,” said William English, a former senior Fed economist who is now a professor at Yale. “The question remains: Will inflation come all the way back to 2 percent without more slack in the labor and goods markets than we’ve seen so far?”To date, the job market has shown little sign of cracking. Hiring and wage growth have slowed, but unemployment stood at a historically low 3.7 percent in November. Consumers continue to spend, and growth in the third quarter was unexpectedly hot.While those are positive developments, they keep alive the possibility that the economy will have a little too much vim for inflation to cool completely, especially in key services categories.“We don’t know how long it will take to go the last mile with inflation,” said Karen Dynan, a former Treasury chief economist who teaches at Harvard. Given that, setting policy next year could prove to be more of an art than a science: If growth is cooling and inflation is coming down, cutting rates will be a fairly obvious choice. But what if growth is strong? What if inflation progress stalls but growth collapses?Mr. Powell acknowledged some of that uncertainty this week.“Inflation keeps coming down, the labor market keeps getting back into balance,” he said. “It’s so far, so good, although we kind of assume that it will get harder from here, but so far, it hasn’t.”Mr. Powell, a lawyer by training who spent a chunk of his career in private equity, is not an economist and has at times expressed caution about using key economic models and guides too religiously. That lack of devotion to the models may come in handy over the next year, Mr. Gapen of Bank of America said.It may leave the Fed chief — and the institution he leads — more flexible as they react to an economy that has been devilishly tricky to predict because, in the wake of the pandemic, past experience is proving to be a poor precedent.“Maybe it was right to have a guy who was skeptical of frameworks manage the ship during the Covid period,” Mr. Gapen said. More

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    Inflation Holds Roughly Steady Ahead of Fed Meeting

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    Consumer prices rose 3.1 percent in the year through November, and a closely watched core index was roughly the same rate as the previous month.Inflation data released on Tuesday showed that price increases remained moderate in November, the latest sign that inflation has cooled substantially from its June 2022 peak. That’s likely to keep the Federal Reserve on track to leave interest rates unchanged at its final meeting of the year, which takes place this week.The Consumer Price Index came out just hours before the Fed began its two-day gathering, which will conclude with the release of an interest rate decision and a fresh set of quarterly economic projections at 2 p.m. on Wednesday. Jerome H. Powell, the Fed chair, is then scheduled to hold a news conference.Central bankers have embraced a recent slowdown in price increases, and Tuesday’s data largely suggested that inflation remains lower than earlier this year. Overall inflation climbed 0.1 percent on a monthly basis, making for a 3.1 percent increase compared to a year earlier.That was cooler than 3.2 percent in October, and it is down notably from a peak above 9 percent in the summer of 2022.But some of the report’s underlying details could keep Fed officials wary as they contemplate what to do next with interest rates. Investors expect central bankers to begin lowering borrowing costs within the first half of 2024, though officials have been trying to keep their options open.After stripping out volatile food and fuel to give a clearer sense of underlying inflation trends, so-called core inflation climbed more quickly on a monthly basis. And a closely watched measure that tracks housing expenses also climbed more quickly; that measure is called “owners’ equivalent rent” because it estimates how much it would cost someone to rent a home that they own, and economists have been expecting it to decline.“It reinforces this idea that it’s going to be a bumpy road to disinflation,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “The Fed cannot cut interest rates too soon in the face of resilient services inflation.”Core inflation was up by 4 percent compared to a year earlier, holding steady from October. That pace remains well above the roughly 2 percent pace that was normal before the onset of the pandemic. More

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    Corporate America Is Testing the Limits of Its Pricing Power

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    Alexander MacKay coleads the Pricing Lab at Harvard Business School, a research center devoted to studying how companies set prices. Since the pandemic, he has watched how businesses have become more willing to experiment with what they charge their customers.Big companies that had previously pushed through one standard price increase per year are now raising prices more frequently. Retailers increasingly use digital price displays, which they can change with the touch of a button. Across the economy, executives trying to maximize profits are effectively running tests to see what prices consumers will bear before they stop buying.Huge disruptions to supply chains pushed up corporate costs during the pandemic and forced many companies to think more creatively about their pricing strategies, Mr. MacKay said. That supercharged a trend toward more rigorous pricing, and showed many companies that they could more boldly play with prices without chasing shoppers away. The experimentation continues even as costs ease.“We may have prices changing more quickly than they have before,” he said. That could mean up or down, though companies are generally more eager to raise prices than cut them. Firms are trying to figure out how to protect the profits they have built since the pandemic. For big companies in the S&P 500 index, the average profit margin — the percentage of profit relative to revenue — soared in late 2020 and into 2021, as government stimulus and the Federal Reserve’s emergency interventions stoked consumer demand. At the same time, companies raised their prices so much that they more than covered higher costs for energy, transportation, labor and other inputs, which have recently started to come down.Corporations as varied as Apple and Williams-Sonoma recently reported their highest-ever margins for the third quarter, while Delta Air Lines said its international routes generated record profitability over the summer.Margins eased somewhat last year, but have recently recovered to levels that would have set records before the pandemic. Average margins in nearly every sector in the S&P 500 are running near or above 10-year highs, according to Goldman Sachs.“Companies are maintaining or even expanding margins because they are not passing these cost cuts onto consumers,” said Albert Edwards, a strategist at Société Générale, who called recent moves in margins “obscene.”

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    Quarterly net profit margin of S&P 500 companies
    Source: FactSetBy The New York TimesNow, companies are trying to figure out how to set prices to protect profits at what could prove to be a turning point. High interest rates and waning savings are making some — though by no means all — shoppers more price sensitive.Many companies may be able to protect profits just by holding prices steady as their own costs come down. But some are still thinking about whether they can push prices up further as demand cools and overall inflation abates.“I don’t think companies have the monopoly power to just willy-nilly raise prices,” said Ed Yardeni, president of the research firm Yardeni Research.There’s a focus on margins over market share.Many corporations are talking on earnings calls about how they are prioritizing profit margins — even when that translates into less growth.Take Sysco, the food wholesaler. Its local market business has turned slower recently, Kevin Hourican, the company’s chief executive, said on an October earnings call.But “Sysco is not reacting by leading with price to win share,” he said, referring to the tactic of cutting prices to gain more customers, which is commonly used during downturns. “Instead, we are focused on profitable growth.”Lennox, a heating and air-conditioning company, is working to perfect its pricing strategy based on years of data, Alok Maskara, the firm’s chief executive, said at an investor event this summer.People in the industry are “margin-dollar focused versus revenue-dollar focused,” he said, implying that fewer, more-profitable sales are preferred to many, less-profitable ones.That’s a shift from post-2009 practice.The focus on higher margins — even if it means selling less — is in some cases a shift away from the conventional wisdom in the years during and after the 2009 recession. Back then, some executives felt compelled to compete on price for cost-sensitive shoppers. For hotels, that meant a focus on filling every room.“If you remember back in the Great Recession, there was this view of let’s just drop rates until we get people to heads in beds,” Leeny Oberg, Marriott’s chief financial officer, said in a September meeting with investors. She added that “it wasn’t necessarily the right strategy all the time.”Now “the industry has clearly learned some lessons,” she said. Over the past few years, the company has aimed for more of a balance between maximizing revenue and profit, she noted.Retailers, which have been caught out by shifting consumer tastes in recent years, are talking more lately about “inventory discipline,” or keeping less product in stock, so that they can avoid selling things at clearance prices. The logic is that it’s better to sacrifice a few sales by running out of products than being forced to slash prices in a way that hits the bottom line.The clothing chain American Eagle Outfitters has been expanding its margins by “maintaining tight inventory and promotional discipline,” Jay Schottenstein, the company’s chief executive, said on a November earnings call.Companies learned they can charge more than they thought.While consumers are pulling back from some purchases as prices rise, that is not universally true — hence the value of experimentation. Robert J. Gamgort, the chief executive of Keurig Dr Pepper, said recently that consumers have shown little reaction to higher costs for carbonated drinks.That suggests “it was too good of a value at the start at this,” he said at an investor conference in September, referring to the recent inflationary period. “It was underpriced.”The company, which raised prices at its U.S. beverage unit by 7 percent last quarter, highlighted “strong gross margin expansion” at the top of its latest earnings report.Some executives also find that they can charge more by branding something as a luxury product or experience.“Despite the current economic environment, we continue to see consumers trade up to premium amenities,” Melissa Thomas, chief financial officer at the movie theater chain Cinemark, said on a November earnings call.But price sensitivity may return.Kellogg, the cereal company, had been passing through substantial price increases without losing customers — a situation economists call low price elasticity. It’s like if you snap a rubber band (raise prices) but it doesn’t react (shoppers keep buying).But recently, consumers are beginning to pull back in response to sticker shock.“Price elasticity has hit the market pretty meaningfully,” Gary Pilnick, Kellogg’s chief executive, said on a call with analysts last month. “You might recall that there’s been about 35 percent of price increases over the last couple of years for us, and the elasticities were fairly benign for quite some time.”Price sensitivity is also showing up at brands that cater to lower-income consumers, like Walmart and McDonald’s, which have seen business expand as wealthier people look for deals.“We continue to gain share with both the middle- and higher-income consumers,” Ian Borden, chief financial officer of McDonald’s, said on an October earnings call, although he noted that the company was seeing its lower-income customers struggle.The ability to raise prices — or keep them high — may not last.Even as companies are getting creative to protect their margins, the economy has also held up better than many expected. Overall growth has remained rapid, consumer spending has expanded, and a long-warned-about recession has remained at bay.The question is whether companies will be able to protect profits in an environment where that momentum slows.“Customers are rebelling,” said Paul Donovan, chief economist at UBS Global Wealth Management. “We have reached that point of resistance.” More

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    Jerome Powell Says It’s Too Soon to Guess When Rates Will Drop

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    The Federal Reserve chair said officials could still raise rates “if” that becomes necessary, and that it’s too soon to guess when they will ease.Jerome H. Powell, the chair of the Federal Reserve, suggested on Friday that the central bank may be done raising interest rates if inflation and the economy continue to cool as expected, saying that central bankers could raise interest rates further if that became necessary.“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Mr. Powell said in a speech at Spelman College. “We are prepared to tighten policy further if it becomes appropriate to do so.”Mr. Powell’s comments are likely to cement an already-widespread expectation that the Fed will leave interest rates unchanged at its meeting on Dec. 12 and 13. The Fed has already raised interest rates to a range between 5.25 and 5.5 percent, up sharply from near-zero as recently as March 2022. Those higher borrowing costs are weighing on demand for mortgages, car loans and business debt, cooling the economy in a bid to lower inflation.Given how high interest rates are now, the Federal Open Market Committee has paused its rate increases for several months. Investors have increasingly come to expect that its next move would be to cut rates — though Fed officials have been hesitant to declare victory, or to confidently predict exactly when lower borrowing costs could arrive.The Fed can “let the data reveal the appropriate path,” Mr. Powell said. “We’re getting what we wanted to get, we now have the ability to move carefully.”The Fed will release fresh economic projections after the December meeting. Those will show where policymakers expect rates to be at the end of 2024. That will give investors a hint at how much officials expect to lower interest rates next year, but little insight into when the cuts might commence.Policymakers want to avoid setting interest rates in a way that crushes the economy, risking much-higher unemployment and a recession. But they also want to be sure to fully stamp out rapid inflation, because if price increases are allowed to run too hot for too long, they could become entrenched in the way that consumers and companies behave. That would make rapid inflation even more difficult to get rid of in the longer run.After months of choppy progress, the Fed has recently received a spate of data suggesting that it is making meaningful progress toward achieving its goals.Inflation has been moderating noticeably, and the slowdown is coming across a range of products and services. The job market has cooled from white-hot levels last year, although companies are still hiring. Consumer spending is showing some signs of deceleration, though it has not fallen off a cliff.All of those signals are combining to give central bankers more confidence that interest rates may be high enough to bring inflation back toward their 2 percent goal within a couple of years. In fact, the data are shoring up optimism that they might be able to pull off a historically rare “soft landing”: Cooling inflation gently and without inflicting serious economic pain.“There’s a path to getting inflation back down to 2 percent without that kind of large job loss,” Mr. Powell said, explaining that he believes a gentle cooling is possible. “We’re on that path.”Still, inflation has cooled before, only to pick back up, and the staying power of consumer spending has surprised many economists. Given that, officials do not want to celebrate prematurely.“As the demand- and supply-related effects of the pandemic continue to unwind, uncertainty about the outlook for the economy is unusually elevated,” Mr. Powell said Friday.The Fed, he said, “is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.” More