Don’t expect ‘immediate relief’ from the Federal Reserve’s first rate cut in years, economist says. Here’s why

Powers: The Fed is going to gradually cut rates, guiding the economy into a soft landing

Recent signs of cooling inflation are paving the way for the Federal Reserve to cut rates when it meets next week, which is welcome news for Americans struggling to keep up with the elevated cost of living and sky-high interest charges.

“Consumers should feel good about [an interest rate reduction] but it’s not going to deliver sizable immediate relief,” said Brett House, economics professor at Columbia Business School.

Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels in more than 40 years. The central bank responded with a series of interest rate hikes that took its benchmark rate to the highest level in decades.

The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.

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“The cumulative progress on inflation — evidenced by the CPI now at 2.5% after having peaked at 9% in mid-2022 — has given the Federal Reserve the green light to begin cutting interest rates at next week’s meeting,” said Greg McBride, chief financial analyst at Bankrate.com, referring to the consumer price index, a broad measure of goods and services costs across the U.S. economy.

However, the impact from the first rate cut, expected to be a quarter percentage point, “is very minimal,” McBride said.

“What borrowers can be optimistic about is that we will see a series of rate cuts that cumulatively will have a meaningful impact on borrowing costs, but it will take time,” he said. “One rate cut is not going to be a panacea.”

Markets are pricing in a 100% probability that the Fed will start lowering rates when it meets Sept. 17-18, with the potential for more aggressive moves later in the year, according to the CME Group’s FedWatch measure.

That could bring the Fed’s benchmark federal funds rate from its current range, 5.25% to 5.50%, to below 4% by the end of 2025, according to some experts.

The federal funds rate, which the U.S. central bank sets, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

Rates for everything from credit cards to car loans to mortgages will be affected once the Fed starts trimming its benchmark. Here’s a breakdown of what to expect:

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.

For those paying 20% interest — or more — on a revolving balance, annual percentage rates will start to come down when the Fed cuts rates. But even then they will only ease off extremely high levels, according to McBride.

“The Fed has to do a lot of rate cutting just to get to 19%, and that’s still significantly higher than where we were just three years ago,” McBride said.

The best move for those with credit card debt is to switch to a 0% balance transfer credit card and aggressively pay down the balance, he said. “Rates won’t fall fast enough to bail you out.”

Mortgage rates

While 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by the Fed’s policy. Home loan rates have already started to fall, largely due to the prospect of a Fed-induced economic slowdown.

As of Sept. 11, the average rate for a 30-year, fixed-rate mortgage was around 6.3%, nearly a full percentage point drop from where rates stood in May, according to the Mortgage Bankers Association.

But even though mortgage rates are falling, home prices remain at or near record highs in many areas, according to Jacob Channel, senior economist at LendingTree.

“This cut isn’t going to totally reshape the economy, and it’s not going to make doing things like buying a house or paying off debt orders of magnitude easier,” he said.

Auto loans

“Auto loan rates will head lower, too, but you shouldn’t expect the blocking and tackling around car shopping to change anytime soon,” said Matt Schulz, chief credit analyst at LendingTree. 

The average rate on a five-year new car loan is now around 7.7%, according to Bankrate.

While anyone planning to finance a new car could benefit from lower rates to come, the Fed’s next move will not have any material effect on what you get, said Bankrate’s McBride. “Nobody is upgrading from a compact to an SUV on a quarter-point rate cut.” The quarter percentage point difference on a $35,000 loan is about $4 a month, he said.

Consumers would benefit more from improving their credit scores, which could pave the way to even better loan terms, McBride said.

Student loans

Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the T-bill or other rates, which means once the Fed starts cutting interest rates, the rates on those private student loans will come down as well.

Eventually, borrowers with existing variable-rate private student loans may also be able to refinance into a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz. 

However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he said, “such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.” Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

As a result of the Fed’s string of rate hikes in recent years, top-yielding online savings account rates have made significant moves and are now paying well over 5%, with no minimum deposit, according to Bankrate’s McBride.

With rate cuts on the horizon, those “deposit rates will come down,” he said. “But the important thing is, what is your return relative to inflation — and that is the good news. You are still earning a return that’s ahead of inflation, as long as you have your money in the right place.”

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The Federal Reserve may not cut interest rates just yet. Here’s what that means for your money

Economists expect the Federal Reserve to leave interest rates unchanged at the end of its two-day meeting this week, even though many experts anticipate the central bank is preparing to start cutting rates in the months ahead.

In prepared remarks earlier this month, Federal Reserve Chair Jerome Powell said policymakers don’t want to ease up too quickly.

Powell noted that lowering rates rapidly risks losing the battle against inflation and likely having to raise rates further, while waiting too long poses danger to economic growth.

But in the meantime, consumers won’t see much relief from sky-high borrowing costs.

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In 2022 and the first half of 2023, the Fed raised rates 11 times, causing consumer borrowing rates to skyrocket while inflation remained elevated, and putting households under pressure.

With the combination of sustained inflation and higher interest rates, “many consumers are experiencing higher levels of economic stress compared to one year ago,” said Silvio Tavares, CEO of credit scoring company VantageScore.

The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

Higher for longer may actually be a good thing, says Douglas Boneparth

Even once the central bank does cut rates — which some now expect could happen in June — the pace that they trim is going to be much slower than the pace at which they hiked, according to Greg McBride, chief financial analyst at Bankrate.

“Interest rates took the elevator going up; they are going to take the stairs coming down,” he said.

Here’s a breakdown of where consumer rates stand now and where they may be headed:

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

With most people feeling strained by higher prices, balances are higher and more cardholders are carrying debt from month to month compared with last year.

Annual percentage rates will start to come down when the Fed cuts rates, but even then they will only ease off extremely high levels. With only a few potential quarter-point cuts on deck, APRs would still be around 20% by the end of 2024, McBride said.

“If the Fed cuts rates twice by a quarter point, your credit card rate will fall by half a percent,” he said.

Mortgage rates

Fifteen- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy. But anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.

Rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is around 7%, up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.

“Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist. “In this environment, there is a good possibility that rates will stay higher for a longer period of time.”

Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate, and those rates remain high.

“The reality of it is, a lot of borrowers are paying double-digit interest rates on those right now,” McBride said. “That is not a low cost of borrowing and that’s not going to change.”

Auto loans

Even though auto loans are fixed, payments are getting bigger because car prices have been rising along with the interest rates on new loans, resulting in less affordable monthly payments. 

The average rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, competition between lenders and more incentives in the market have started to take some of the edge off the cost of buying a car lately, said Ivan Drury, Edmunds’ director of insights.

Once the Fed cuts rates, “that gives people a little more breathing room,” Drury said. “Last year was ugly all around. At least there’s an upside this year.”

Federal student loans

Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But undergraduate students who take out new direct federal student loans are now paying 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.

Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are already paying more in interest. How much more, however, varies with the benchmark.

For those struggling with existing debt, there are ways federal borrowers can reduce their burden, including income-based plans with $0 monthly payments and economic hardship and unemployment deferments

Private loan borrowers have fewer options for relief — although some could consider refinancing once rates start to come down, and those with better credit may already qualify for a lower rate.

Savings rates

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As inflation falls, corporate America won’t rush to pay the price

U.S. President Joe Biden delivers remarks during an event to celebrate the anniversary of his signing of the 2022 Inflation Reduction Act legislation, in the East Room of the White House in Washington, U.S., August 16, 2023. 

Kevin Lamarque | Reuters

In recent weeks, President Joe Biden has been doing everything he can to point the finger at big corporations for high prices.

“Too many things are unaffordable,” the president said.

“Stop the price gouging,” Biden said on another recent occasion.

The blame game may be good retail politics, and the president has announced some real actions to alleviate consumer financial stress, forgiving as much student debt on the margins as he can under the law, unveiling various plans to eliminate “junk fees,” and using new powers under the Inflation Reduction Act to bring down key drug prices.

Some recent research supports the case that corporations have taken more advantage of the current inflationary era than they really need to do. But amid the political pressure, don’t expect corporate America to be swayed.

As the Federal Reserve signals for the first time that it’s getting comfortable with the decline in inflation, and even short of declaring “mission accomplished” seemed to say this week it doesn’t wholly disagree with the market view that rates cuts are the next phase in its monetary policy, the one major force in the economy not talking about cuts in a major way is corporations.

That’s been on the mind of Fed presidents as the central bank contemplates a big shift. Richmond Fed President Tom Barkin, a former corporate sector CFO, recently told CNBC that one area he monitors and speaks to companies about is price setting. Companies won’t be giving up their power to raise prices “until they have to,” Barkin, who will be a voting member of the FOMC next year, said.

It’s been a hard-won advantage. Over the past two decades, price setters “have been beaten up,” Barkin said, by the combination of ecommerce, globalization, access to new supply and the power of big box retailers. “If you go back to 2018-2019, you had people who really weren’t into raising prices [as they] didn’t think they had the power to do it. I’m out there talking to price setters now and there are some who have taken a step back and said, ‘Okay, we’re on the backside of this,’ but I still talk [to others] who are looking to get more price.”

During an interview later in November with Barkin at CNBC’s CFO Council Summit in Washington, D.C., the subject came up again, and an informal poll of CFO Council members in the room on the subject of pricing plans for 2024 was taken. A majority said their companies would be raising prices next year; a minority said they would keep pricing the same; none said they would be lowering prices. 

“I’m looking for the point where they’re no longer taking outsized price increases because they’re worried the volume and the market won’t sustain it,” Barkin said.

That is happening in certain goods markets where the Covid outsized demand has waned, and as the pressures in the real estate market with high mortgage rates have cut down on purchases for the home. It’s also a function of a massive freight market recession, which has sharply lowered transportation costs for shippers after a period of huge contract rate increases during the pandemic boom. A recent decline in energy prices has also lessened input cost pressures.

Costco CFO Richard Galanti said after its earnings this week that inflation for the quarter just ended was in the 0% to 1% range. But the big moves were in the “big and bulky items,” like furniture sets due to lower freight costs year-over-year, as well as on “things like domestics,” he said. And what he called the “deflationary items” were steeply down in price, as much as 20% to 30%.

Toys are another example.

No one wants to be the first to cut prices

Overall, though, the economy is not headed for deflation, and the Fed’s stance this week may have given companies more room to keep prices where they want if real wage growth proves sustainable. Inflation is falling faster than wages,” said KMPG chief economist Diane Swonk. “That does not equate to deflation. The goal is to keep that trend going, so that consumers regain the purchasing power lost to inflation.”

But with any easing of rates, the central bank is “willing to throw the dice, and enable the economy to grow more rapidly rather than risk recession,” Swonk said. “That is a major shift from where we were a year ago. They knew that the decision to call an end to rate hikes would trigger financial markets to ease. That was like a stealth cut in rates. It will stimulate the economy. Improvements in inflation are expected to continue, but the pace at which price increases decelerate could slow.”

New York Fed President John Williams: We aren't really talking about rate cuts right now

The recent tailwinds from a softer freight market may be near their end, too. A logistics CFO speaking on a CNBC CFO Council member call on Tuesday about the market outlook said that after one of the longest stretches in recent history for a freight recession, the trough may have been reached. “Truck rates may start bouncing off of a bottom here,” said the logistics CFO on the call, where chief financial officers are granted anonymity to speak freely.

While the Fed may get its wish of a “soft landing” for the economy, that doesn’t mean prices will land as softly for consumers, according to Marco Bertini, a professor of marketing at business school Esade who studies pricing strategy and pricing psychology. “Companies will do what they want and will never react at the speed you want them to, especially after they have been increasing prices,” Bertini said. “Why would I be the first to cut my margins when we just went through a period where we had the world’s best excuse [inflation] to recover margins?” he said.

At some point, companies will need to reassess pricing strategy, especially with margins more than recovered for many, and this period of rapid inflation in the U.S. doesn’t have a precedent for companies to use as a barometer of how to shift. “It’s uncharted territory for the U.S. market,” Bertini said.

That’s part of the reason why not one CFO raised their hand at the CNBC CFO Council Summit when asked if any were considering a price decrease for 2024.

“Imagine I am the first to say I am holding on prices, and make that known to customers? That’s how a price war starts and the competitive advantage from being the ‘good guy’ lasts two seconds,” Bertini said. “No one wants a race to the bottom. The gains over the past few years evaporate in a few months.”

Deflation versus slowing of price increases

There are some signs that the pricing conversation is starting to become more prevalent inside companies beyond the goods areas where demand has been hit hard. But recent declines in pricing don’t indicate that companies will continue in that direction across a broader array of products and services.

“The Fed doesn’t want to see deflation,” said one retail sector CFO on the recent CNBC CFO Council call. “They just want to see inflation cool. And they want to see us get to the point where we can’t raise prices anymore.”

While the CFO said there has been a “settling in the market in the last couple of months, I wouldn’t call it deflation.”

But he pointed to transportation costs as a deflationary force that is having an influence on importers, “a one-time kind of release of supply and demand imbalances … but it’s a price correction to me that is different than deflation. … I think we’ve kind of been through an interesting phase of price correction. But I’d say things are pretty stable from our perspective.”

Consumers have been 'as resilient as they could be,' says former Walmart U.S. CEO Bill Simon

In food distribution, costs for key commodities continue to experience deflation on a sequential basis. But consumers going out to eat won’t see that in the prices they pay.

“We’re in a period where restauranteurs have taken many prices up,” said another retail CFO on the call. “They’re seeing that deflation in their underlying ingredients, so they’re actually going to start seeing a little bit better performance in terms of their bottom line. Now that they’ve taken the prices up, we just don’t think they’re gonna take it down very quickly.”

The science of pricing, according to Bertini, dictates that as long as a company can point to an externality — in this case, higher input costs — the buyer ultimately accepts the situation, and price stickiness is the result.

But the current environment is edging into more of an “unstable equilibrium.”

“When inflation is in the public domain, it’s perfect to collaborate in a perfectly legal way to increase prices. Now the shocks are gone and costs slowly coming down, and the appetite to be the one to decrease prices and get market share gain is increasingly getting bigger,” he said. “But being the first will take some time, because they’re still enjoying it. … What it will take in most markets is a competitor who sees a clear path to getting lots of market share.”

When the party will end for corporations

This difficult balance is also coming during a period of time when the consumer has defied expectations of a slowdown in spending, making it harder for companies to pinpoint just how big the market opportunity really is. Retail sales, as an example, just came in much stronger than expected.

“We’re still trying to understand how strong November retail sales should have been relative to normal, and relative to what’s happened the last three years. It makes it hard,” the logistics CFO said on the recent CNBC CFO Council call.

The view from Costco CFO Galanti after its earnings this week is instructive. Speaking about food, he said it’s been a different story than with goods: “There hasn’t been significant price cuts passed on to the consumer yet.”

“There are a few things that are up and a few things are down, but no giant trend either way. Look, as you’ve known us for a long time, we want to be the first to lower prices. We’re out there pressing our vendors as we see different commodity components come down and certainly on the non-food side as we saw shipping costs come down, things like that. And so, probably a little more than less, but we’ll have to wait and see.”

If the period of price increases is to end, expect there to be a lag between that and other forces in the economy, such as the Fed, said Bertini. “Who wants to end the party early? They will want to see some really strong evidence that the party has ended.”

Another analogy from a CFO on the recent CNBC Council call may have put it best:

“We’re all a bunch of cars on a highway. You’ve got the customer, a retailer, you’ve got the manufacturer. Maybe you’ve got capital providers. And who hits the brakes first? Who wants to hit the brakes before the person in front of them hits the brakes?” 

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Long Covid is distorting the labor market — and that’s bad for the U.S. economy

Charlotte Hultquist

Charlotte Hultquist

Weeks after Charlotte Hultquist got Covid-19 in November 2020, she developed a severe pain in her right ear.

“It felt like someone was sticking a knife in [it],” said Hultquist, a single mother of five who lives in Hartford, Vermont.

The 41-year-old is one of millions of Americans who have long Covid. The chronic illness carries a host of potentially debilitating symptoms that can last for months or years, making it impossible for some to work.

For about a year, Hultquist was among those long Covid patients sidelined from the workforce. She would fall constantly, tripping just by stepping over a toy or small object on the floor. She eventually learned that the balance issues and ear pain resulted from a damaged vestibular nerve, a known effect of long Covid. After rigorous testing, a physical therapist told Hultquist she had the “balance of a 1-year-old learning to walk.”

Her body — which she said felt like it weighed 1,000 pounds — couldn’t regulate its temperature, causing dramatic swings from cold to hot.

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Here’s a look at more stories on the complexities and implications of long Covid:

Her work on the Dartmouth Hitchcock Medical Center’s information desk required a sharp memory of the hospital’s layout — but long Covid dulled that clarity, too. She had to quit her job as a patient care representative in March 2021.

“I couldn’t work when my memory just kept failing,” Hultquist said.

There remain many unknowns about long Covid, including causes, cures, even how to define it. But this much is clear: The illness is disabling thousands, perhaps millions, of workers to such an extent that they must throttle back hours or leave the workforce altogether.

In other words, at a time when job openings are near an all-time high, long Covid is reducing the supply of people able to fill those positions. The dynamic may have large and adverse effects on the U.S. economy.

Long Covid “is certainly wind blowing in the other direction” of economic growth, said Betsey Stevenson, a professor of public policy and economics at the University of Michigan who served as chief economist for the U.S. Department of Labor in the Obama administration.

Up to 4 million people are out of work

Mild symptoms, employer accommodations or significant financial need can all keep people with long Covid employed. But in many cases, long Covid impacts work.

Katie Bach

nonresident senior fellow at the Brookings Institution

Katie Bach, a nonresident senior fellow at the Brookings Institution, has published one of the higher estimates to date. She found that 2 million to 4 million full-time workers are out of the labor force due to long Covid. (To be counted in the labor force, an individual must have a job or be actively looking for work.)

The midpoint of her estimate — 3 million workers — accounts for 1.8% of the entire U.S. civilian labor force. The figure may “sound unbelievably high” but is consistent with the impact in other major economies like the United Kingdom, Bach wrote in an August report. The figures are also likely conservative, since they exclude workers over age 65, she said.

“Mild symptoms, employer accommodations or significant financial need can all keep people with long Covid employed,” Bach said. “But in many cases, long Covid impacts work.”

Impact akin to extra year of baby boomers retiring

Other studies have also found a sizable, though more muted, impact.

Economists Gopi Shah Goda and Evan Soltas estimated 500,000 Americans had left the labor force through this June due to Covid.

That led the labor force participation rate to fall by 0.2 percentage points — which may sound small but amounts to about the same share as baby boomers retiring each year, according to the duo, respectively of the Stanford Institute for Economic Policy Research and the Massachusetts Institute of Technology.

Put another way: Long Covid’s labor impact translates to an extra year of population aging, Goda said.

For the average person, the work absence from long Covid translates to $9,000 in foregone earnings over a 14-month period — representing an 18% reduction in pay during that time, Goda and Soltas said. In aggregate, the lost labor supply amounts to $62 billion a year — equivalent to half the lost earnings attributable to illnesses like cancer or diabetes.

What’s more, foregone pay may complicate a person’s ability to afford medical care, especially if coupled with the loss of health insurance through the workplace.

A separate Brookings paper published in October estimated about 420,000 workers aged 16 to 64 years old had likely left the labor force because of long Covid. The authors — Louise Sheiner and Nasiha Salwati — cite a “reasonable” range of 281,000 to 683,000 people, or 0.2% to 0.4% of the U.S. labor force.

About 26% of long-haulers said their illness negatively affected employment or work hours, according to a July report published by the Federal Reserve Bank of Minneapolis. Those with long Covid were 10 percentage points less likely to be employed than individuals without a prior Covid infection, and worked 50% fewer hours, on average, according to Dasom Ham, the report’s author.

Return to work can be ‘a really frustrating experience’

Outside of these economic models, the labor impact was borne out in numerous CNBC interviews with long Covid patients and doctors who specialize in treating the illness.

Just half of the patients who visit the Mayo Clinic’s Covid Activity Rehabilitation Program can work a full-time schedule, said Dr. Greg Vanichkachorn, the program’s medical director.

“Because of the brain fog issues in addition to physical symptoms, many patients have had a really frustrating experience trying to get back to work,” Vanichkachorn said.

Those able to return, even part-time, sometimes face hostility from employers and co-workers, he added.

For one, many of the hundreds of potential long Covid symptoms are invisible to others, even if disabling for the afflicted. Difficulty meeting a work deadline due to brain fog or extreme fatigue, for example, may not be met kindly by their colleagues.

Long Covid is so different for so many different people.

Alice Burns

associate director of the Program on Medicaid and the Uninsured at health-care nonprofit The Henry J. Kaiser Family Foundation

“There are some people out there who don’t even think Covid exists,” Vanichkachorn said.

Meanwhile, long Covid can put even accommodating employers in a tricky situation. It can take several months for a patient to make progress in treatment and therapy — meaning some businesses may need to make tough retention, hiring and personnel decisions, Vanichkachorn said. Lengthy recovery times mean a patient’s job might be filled in the interim, he said.

And patients’ symptoms can relapse if they push themselves too rigorously, experts said.

“You can bring a [long Covid] diagnosis to your employer, but it doesn’t allow you to say, ‘I need to be part time for X number of months,” said Alice Burns, associate director of the Program on Medicaid and the Uninsured at health care nonprofit the Henry J. Kaiser Family Foundation. “It may be more months or fewer months; it may mean you can return 10% or 80%.

“That’s just because long Covid is so different for so many different people.”

Why the long Covid labor gap matters

Jerome Powell, chair of the Federal Reserve, mentioned Sheiner and Salwati’s long Covid research in a recent speech about inflation and the labor market.

Millions of people left the labor force in the early days of the pandemic, due to factors like illness, caregiving and fear of infection. But workers haven’t returned as quickly as imagined, particularly those outside their prime working years, Powell said. About 3.5 million workers are still missing, he said.

While most of that shortfall is due to “excess” (i.e., early) retirements, “some of the participation gap” is attributable to long Covid, Powell said. Other big contributors to the shortfall include a plunge in net immigration to the U.S. and a surge in deaths during the pandemic, he added.

“Looking back, we can see that a significant and persistent labor supply shortfall opened up during the pandemic — a shortfall that appears unlikely to fully close anytime soon,” the Fed chair said.

That shortfall has broad economic repercussions.

When the U.S. economy started to reopen in early 2021 from its pandemic-era hibernation — around the time Covid vaccines became widely available to Americans — demand for labor catapulted to historic highs.

Job openings peaked near 12 million in March 2022 and remain well above the pre-pandemic high. There are currently 1.7 job openings per unemployed American — meaning the available jobs are almost double the number of people looking for work, though the ratio has declined in recent months.  

That demand has led businesses to raise wages to compete for talent, helping fuel the fastest wage growth in 25 years, according to Federal Reserve Bank of Atlanta data.

Why long Covid could cost the U.S. nearly $4 trillion

While strong wage growth “is a good thing” for workers, its current level is unsustainably high, Powell said, serving to stoke inflation, which is running near its highest level since the early 1980s. (There are many tentacles feeding into inflation, and the extent to which wage growth is contributing is the subject of debate, however.)

A worker shortage — exacerbated by long Covid — is helping underpin dynamics that have fueled fast-rising prices for household goods and services.

But the labor gap is just the “tip of the iceberg,” said Stevenson at the University of Michigan. There are all sorts of unknowns relative to the economic impact of long Covid, such as effects on worker productivity, the types of jobs they can do, and how long the illness persists, she said.

“When you’re sick, you’re not productive, and that’s not good for you or for anybody around you,” Stevenson said of the economic impact.

For example, lost pay might weigh on consumer spending, the lifeblood of the U.S. economy. The sick may need to lean more on public aid programs, like Medicaid, disability insurance or nutrition assistance (i.e., food stamps) funded by taxpayer dollars.

Economic drag will rise if recovery rates don’t improve

In all, long Covid is a $3.7 trillion drain on the U.S. economy, an aggregate cost rivaling that of the Great Recession, estimated David Cutler, an economist at Harvard University. Prior to the pandemic, the Great Recession had been the worst economic downturn since the Great Depression. His estimate is conservative, based on known Covid cases at the time of his analysis.

Americans would forgo $168 billion in lost earnings — about 1% of all U.S. economic output — if 3 million were out of work due to long Covid, said Bach of the Brookings Institution. That burden will continue to rise if long Covid patients don’t start recovering at greater rates, she said.

“To give a sense of the magnitude: If the long Covid population increases by just 10% each year, in 10 years, the annual cost of lost wages will be half a trillion dollars,” Bach wrote.

Charlotte Hultquist

Charlotte Hultquist

Hultquist was able to return to the workforce part time in March, after a yearlong absence.

The Vermont resident sometimes had to reduce her typical workweek of about 20 hours, due partly to ongoing health issues, as well as multiple doctor appointments for both her and her daughter, who also has long Covid. Meanwhile, Hultquist nearly emptied her savings.

Hultquist has benefited from different treatments, including physical therapy to restore muscle strength, therapy to “tone” the vagus nerve (which controls certain involuntary bodily functions) and occupational therapy to help overcome cognitive challenges, she said.

“All my [health] providers keep saying, ‘We don’t know what the future looks like. We don’t know if you’ll get better like you were before Covid,'” Hultquist said.

The therapy and adaptations eventually led her to seek full-time employment. She recently accepted a full-time job offer from the New Hampshire Department of Health & Human Services, where she’ll serve as a case aide for economic services.

“It feels amazing to be recovered enough to work full time,” Hultquist said. “I’m very far from pre-Covid functioning but I found a way to keep moving forward.”

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UBS sees a raft of Fed rate cuts next year on the back of a U.S. recession

U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023.

Evelyn Hockstein | Reuters

UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.

In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”

UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”

Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%.

The central bank has since held at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.

However, Fed Chairman Jerome Powell said last week that he was “not confident” the FOMC had yet done enough to return inflation sustainably to its 2% target.

'Pretty confident' the Fed can plateau rates at current level, Goldman strategist says

UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”

“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.

“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”

The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.

“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.

U.S. Treasury yield curve will likely continue to steepen, analyst says

“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.”

UBS expects the economy to contract by half a percentage point in the middle of next year, with annual GDP growth dropping to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.

“With that added disinflationary impulse, we expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025. We forecast some slowing in 2026, in part due to projected fiscal consolidation,” the bank’s economists said.

Worst credit impulse since the financial crisis

Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.

“The credit impulse is now at its worst level since the global financial crisis — we think we’re seeing that in the data. You’ve got margin compression in the U.S. which is a good precursor to layoffs, so U.S. margins are under more pressure for the economy as a whole than in Europe, for instance, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference.

Signs of a recession may be on the horizon, says fmr. Fed economist Claudia Sahm

Meanwhile, private payrolls ex-health care are growing at close to zero and some of the 2023 fiscal stimulus is rolling off, Kapteyn noted, also reiterating the “massive gap” between real incomes and spending that means there is “much more scope for that spending to fall down towards those income levels.”

“The counter that people then have is they say ‘well why are income levels not going up, because inflation is falling, real disposable incomes should be improving?’ But in the U.S., debt service for households is now increasing faster than real income growth, so we basically think there is enough there to have a few negative quarters mid-next year,” Kapteyn argued.

A recession is characterized in many economies as two consecutive quarters of contraction in real GDP. In the U.S., the National Bureau of Economic Research Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” This takes into account a holistic assessment of the labor market, consumer and business spending, industrial production, and incomes.

Goldman ‘pretty confident’ in the U.S. growth outlook

The UBS outlook on both rates and growth is well below the market consensus. Goldman Sachs projects the U.S. economy will expand by 2.1% in 2024, outpacing other developed markets.

Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the U.S. growth outlook.

“Real income growth looks to be pretty firm and we think that will continue to be the case. The global industrial cycle which was going through a pretty soft patch this year, we think, is showing some signs of bottoming out, including in parts of Asia, so we feel pretty confident about that,” he told CNBC’s “Squawk Box Europe.”

Trivedi added that with inflation returning gradually to target, monetary policy may become a bit more accommodative, pointing to some recent dovish comments from Fed officials.

“I think that combination of things — the lessening drag from policy, stronger industrial cycle and real income growth — makes us pretty confident that the Fed can stay on hold at this plateau,” he concluded.

Correction: Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%. An earlier version misstated the range.

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Why oil is down since the Hamas-Israel conflict started and whether that can last

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Central banks look to have hit peak rates. Here’s how markets think they’ll come down

A trader works, as a screen displays a news conference by Federal Reserve Board Chairman Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange (NYSE) in New York City, July 26, 2023.

Brendan McDermid | Reuters

The world’s major central banks paused their interest rate hiking cycles in recent weeks and with data suggesting economies are softening, markets are turning their attention to the first round of cuts.

The U.S. Federal Reserve, European Central Bank and the Bank of England dramatically hiked rates over the last 18 months in a bid to tame runaway inflation.

The Fed on Wednesday held benchmark interest rates steady at a target range of 5.25%-5.5% for the second consecutive meeting after ending a string of 11 hikes in September.

Though Chairman Jerome Powell has been keen to reiterate that the Fed’s work on inflation is not yet done, the annual rise in the consumer price index came in at 3.7% in September, down from a pandemic-era peak of 9.1% in June 2022.

Yet despite Powell’s refusal to close the door on further increases in order to finish the job on inflation, markets interpreted the central bank’s tone as a slightly dovish pivot and rallied on the back of the decision.

The market is now narrowly pricing a first 25 basis point cut from the Fed on May 1, 2024, according to CME Group’s FedWatch tool, with 100 basis points of cuts now expected by the end of next year.

Since last week’s decision, U.S. nonfarm payrolls came in softer than expected for October, with job creation below trend, unemployment rising slightly and a further deceleration in wages. Although headline inflation remained unchanged at 3.7% annually from August to September, the core figure came down to 4.1%, having roughly halved over the last 12 months.

The first rate cut from the Fed won't come until mid-next year, says Evercore ISI's Julian Emanuel

“Core PCE, which is the Fed’s preferred inflation metric, is even lower at 2.5% (3-month, annualized),” noted analysts at DBRS Morningstar.

“The lagged effects of a cooler housing market should reinforce the disinflationary trend over the next few months.”

But despite the dovish data points, short-term U.S. Treasurys reversed course to sell off on Monday, which Deutsche Bank’s Jim Reid chalked up to investors beginning to “wonder if last week’s narrative about rate cuts was overdone.”

“The U.S. economy is also proving more resilient than the U.K. and euro zone,” he said.

“For instance, market pricing for the Fed now implies a 16% chance of another rate hike, up from 11% on Friday,” Reid said in an email Tuesday.

“Moreover, the rate priced in by the December 2024 meeting was up +12.4bps to 4.47%. So there was a clear, albeit partial unwinding of last week’s moves.”

Reid also highlighted that this is the seventh time this cycle that markets have notably reacted on dovish speculation.

“Clearly rates aren’t going to keep going up forever, but on the previous 6 occasions we saw hopes for near-term rate cuts dashed every time. Note that we’ve still got above-target inflation in every G7 country,” he added.

The ECB

The European Central Bank late last month ended its run of 10 consecutive hikes to keep its benchmark interest rate at a record high of 4%, with euro zone inflation falling to a two-year low of 2.9% in October and the core figure also continuing to decline.

The market is also pricing almost 100 basis point of cuts for the ECB by December 2024, but the first 25 basis point reduction is mostly priced in for April, with economic weakness across the 20-member common currency bloc fueling bets that the central bank will be the first to start unwinding its tight policy position.

Gilles Moëc, group chief economist at AXA, said October’s inflation print confirmed and amplified the message that “disinflation has come in earnest to Europe,” vindicating the ECB’s “new-found prudence.”

ECB done with hikes barring unforeseen shocks, Bank of Portugal's Centeno says

“Of course, the current disinflation does not preclude the possibility that a ‘line of resistance’ would be found well above the ECB’s target. Yet, the confirmation that the euro area was flirting with recession last summer reduces this probability,” Moëc said in a research note Monday.

After the October meeting, ECB President Christine Lagarde batted away the suggestion of rate cuts, but National Bank of Greece Governor Yannis Stournaras has since openly discussed the possibility of a reduction in the middle of 2024 provided inflation stabilizes below 3%.

“This implicitly advocates a forward-looking version of monetary policy which takes lags into consideration to calibrate its stance. In clear, waiting for inflation to reach 2% before cutting rates would be ‘overkill,'” Moëc said.

“There is no doubt in our mind that the current dataflow is clearly favouring the doves, but the hawks are far from having given up the fight.”

The Bank of England

The Bank of England on Thursday kept its main policy rate unchanged at 5.25% for a second consecutive meeting after ending a run of 14 straight hikes in September.

However, minutes from last week’s meeting reiterated the Monetary Policy Committee’s expectations that rates will need to stay higher for longer, with the U.K. CPI holding steady at 6.7% in September. Despite this, the market on Monday was pricing around 60 basis points of cuts by December 2024, albeit starting in the second half of the year.

BNP Paribas economists on Thursday noted an “eye-catching” addition to the MPC’s guidance, which said its latest projections indicated that “monetary policy was likely to need to be restrictive for an extended period of time.”

Watch CNBC's full interview with Bank of England Governor Andrew Bailey

“Governor Andrew Bailey’s comments at the press conference indicated that this guidance was not intended as push-back on the market-implied policy rate path that underpins its latest forecasts, where a 25bp cut is not fully priced in until the second half of 2024,” they said.

“Instead, the intention was to indicate that cuts are not likely to feature as part of the conversation any time soon.”

At Thursday’s news conference, Bailey emphasized the upside risks to the bank’s inflation projections, rather than entertaining any suggestion of cuts on the horizon.

“While we don’t think it is necessarily indicative of a high risk of further hikes in the near term, we read it as a further sign that the MPC is not considering rate cuts and will not do so for a while,” BNP Paribas added.

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As the market enters correction territory, don’t blame the American consumer

An Amazon.com Inc worker prepares an order in which the buyer asked for an item to be gift wrapped at a fulfillment center in Shakopee, Minnesota, U.S., November 12, 2020.

Amazon.com Inc | Reuters

The initial third-quarter report on gross domestic product showed consumer spending zooming higher by 4% percent a year, after inflation, the best in almost two years. September’s retail sales report showed spending climbing almost twice as fast as the average for the last year. And yet, bears like hedge-fund trader Bill Ackman argue that a recession is coming as soon as this quarter and the market has entered correction territory.

For an economy that rises or falls on the state of the consumer, third-quarter earnings data supports a view of spending that remains mostly good. S&P 500 consumer-discretionary companies that have reported through Oct. 25 saw an average profit gain of 15%, according to CFRA — the biggest revenue gain of the stock market’s 11 sectors.

“People are kind of scratching their heads and saying, ‘The consumer is holding up better than expected,'” said CFRA Research strategist Sam Stovall said. “Consumers are employed. They continue to buy goods as well as pursue experiences. And they don’t seem worried about debt levels.” 

How is this possible with interest rates on everything from credit cards to cars and homes soaring?

It’s the anecdotes from bellwether companies across key industries that tell the real story: Delta Air Lines and United Airlines sharing how their most expensive seats are selling fastest. Homeowners using high-interest-rate-fighting mortgage buydowns. Amazon saying it’s hiring 250,000 seasonal workers. A Thursday report from Deckers Outdoor blew some minds — in what has been a tepid clothing sales environment — by disclosing that embedded in a 79% profit gain that sent shares up 19% was sales of Uggs, a mature line anchored by fuzzy boots, rising 28%.

The picture they paint largely matches the economic data — generally positive, but with some warts. Here is some of the key evidence from from the biggest company earnings reports across the market that help explain how companies and the American consumer are making the best of a tough rate environment.

How homebuilders are solving for mortgages rates

No industry is more central to the market’s notion that the consumer is falling from the sky than housing, because the number of existing home sales have dropped almost 40% from Covid-era peaks. But while Coldwell Banker owner Anywhere Real Estate saw profit fall by half, news from builders of new homes has been pretty good.

Most consumers have mortgages below 5%, but for new homebuyers, one reason that rates are not biting quite as sharply as they should is that builders have figured out ways around the 8% interest rates that are bedeviling existing home sellers. That helps explains why new home sales are up this year. Homebuilders are dipping into money that previously paid for other incentives to pay for offering mortgages at 5.75% rather than the 8% level other mortgages have hit. At PulteGroup, the nation’s third-biggest builder, that helped drive an 8% third-quarter profit jump and 43% climb in new home orders for delivery later, much better than the government-reported 4.5% gain in new home sales year-to-date.

“What we’ve done is simply redistribute incentives we’ve historically offered toward cabinets and countertops, and redirected those to interest rate incentives,” PulteGroup CEO Ryan Marshall said. “And that has been the most powerful thing.”

PulteGroup CEO Ryan Marshall on Q3 earnings: Demand remains strong despite mortgage rate surge

The mechanics are complex, but work out to this: Pulte sets aside about $35,000 for incentives to get each home to sell, or about 6% of its price, the company said on its earnings conference call. Part of that is paying for a mortgage buydown. About 80% to 85% of buyers are taking advantage of the buydown offer. But many are splitting the funds, mixing a smaller rate buydown and keeping some goodies for the house, the company said.

Wells Fargo economist Jackie Benson said in a report that builders may struggle to keep this strategy going if mortgage rates stay near 8%, but new-home prices have dropped 12% in the last year. In her view, incentives plus bigger price cuts than most existing homes’ owners will offer is giving builders an edge. 

At auto companies, price cuts are in, and more are coming

Car sales picked up notably in September, rising 24% year-over-year, more than twice the year-to-date gain in unit sales. But they were below expectations at electric-vehicle leader Tesla, which blamed high interest rates, and at Ford

“I just can’t emphasize this enough, that for the vast majority of people buying a car it’s about the monthly payment,” Tesla CEO Elon Musk said on its earnings call. “And as interest rates rise, the proportion of that monthly payment that is interest increases.” 

Maybe, but that’s not what’s happening at General Motors, even if investor reaction to good numbers at GM was muted because of the strike by the United Auto Workers union. 

GM tops Q3 expectations but pulls full-year guidance due to mounting UAW strike costs

GM beat earnings expectations by 40 cents a share, but shares fell 3% because of investor worries about the strike, which forced GM to withdraw its fourth-quarter earnings forecast on Oct. 24. Ford, which settled with the UAW on Oct. 25, said the next day it had a “mixed” quarter, as profit missed Wall Street targets due to the strike. Consumers came through, as unit sales rose 7.7% for the quarter, with truck and EV sales both up 15%. GM CEO Mary Barra said on GM’s analyst call that the company gained market share, posting a 21% gain in unit sales despite offering incentives below the industry average.

“While we hear reports out there in the macro that consumer sentiment might be weakening, etc., we haven’t seen that in demand for our vehicles,” GM CFO Paul Jacobson told analysts. But Ford CFO John Lawler said car prices need to decline by about $1,800 to be as affordable as they were before Covid. “We think it’s going to happen over 12 to 18 months,” he said. 

Tesla’s turnaround plan turns on continuing to lower its cost of producing cars, which came down by about $2,000 per vehicle in last year, the company said. Along with federal tax credits for electric vehicles, a Model Y crossover can be had for about $36,490, or as little as $31,500 in states with local tax incentives for EVs. That’s way below the average for all cars, which Cox Automotive puts at more than $50,000. But Musk says some consumers still aren’t convincible. .

“When you look at the price reductions we’ve made in, say, the Model Y, and you compare that to how much people’s monthly payment has risen due to interest rates, the price of the Model Y is almost unchanged,” Musk said. “They can’t afford it.”

Most banks say the consumer still has cash, but not Discover

To know how consumers are doing, ask the banks, which disclose consumer balances quarterly. To know if they’re confident, ask the credit card companies (often the same companies) how much they are spending. 

In most cases, financial services firms say consumers are doing well.

At Bank of America, consumer balances are still about one-third higher than before Covid, CEO Brian Moynihan said on the company’s conference call. At JPMorgan Chase, balances have eroded 3% in the last year, but consumer loan delinquencies declined during the quarter, the company said.

“Where am I seeing softness in [consumer] credit?” said chief financial officer Jeremy Barnum, repeating an analyst’s question on the earnings call. “I think the answer to that is actually nowhere.”

Among credit card companies, the “resilient” is still the main story. MasterCard, in fact, used that word or “resilience” eight times to describe U.S. consumers in its Oct. 26 call.

“I mean, the reality is, unemployment levels are [near] all-time record lows,” MasterCard chief financial officer Sachin Mehra said.

At American Express, which saw U.S. consumer spending rise 9%, the mild surprise was the company’s disclosure that young consumers are adding Amex cards faster than any other group. Millennials and Gen Zers saw their U.S. spending via Amex rise 18%, the company said.

“Guess they’re not bothered by the resumption of student loan payments,” Stovall said.

Consumer data is more positive than sentiment, says Bankrate's Ted Rossman

The major fly in the ointment came from Discover Financial Services, one of the few banks to make big additions to its loan loss reserves for consumer debt, driving a 33% drop in profit as Discover’s loan chargeoffs doubled.  

Despite the fact that U.S. household debt burdens are almost exactly the same as in late 2019, and declined during the quarter, according to government data, Discover chief financial officer John Greene said on its call, “Our macro assumptions reflect a relatively strong labor market but also consumer headwinds from a declining savings rate and increasing debt burdens.”

At airlines, still no sign of a travel recession

It’s good to be Delta Air Lines right now, sitting on a 59% third-quarter profit gain driven by the most expensive products on their virtual shelves: First-class seats and international vacations. Also good to be United, where higher-margin international travel rose almost 25% and the company is planning to add seven first-class seats per departure by 2027. Not so good to be discounter Spirit, which saw shares fall after reporting a $157 million loss.

“With the market continuing to seemingly will a travel recession into existence despite evidence to the contrary from daily [government] data and our consumer surveys, Delta’s third-quarter beat and solid fourth-quarter guide and commentary should finally put the group at ease about a consumer “cliff,” allow them to unfasten their seatbelts and walk about the cabin,” Morgan Stanley analyst Ravi Shanker said in a note to clients.

One tangible impact: United is adding 20 planes this quarter, though it is pushing 12 more deliveries into 2024, while Spirit said it’s delaying plane deliveries, and focusing on its proposed merger with JetBlue and cost-cutting to regain competitiveness as soft demand for its product persists into the holiday season.

As has been the case throughout much of 2023, richer consumers — who contribute the greater share of spending — are doing better than moderate-income families, Sundaram said.

The goods recession is for real

Whirlpool, Ethan Allen and mattress maker Sleep Number all saw their stocks tumble after reporting bad earnings, all of them experiencing sales struggles consistent with the macro data.

This follows a trend now well-entrenched in the economy: people stocked up on hard goods, especially for the house, during the pandemic, when they were stuck at home more. All three companies saw shares surge during Covid, and growth has slacked off since as they found their markets at least partly saturated and consumers moved spending to travel and other services.

“All of the stimulus money went to the furniture industry,” Sundaram said, exaggerating for effect. “Now they’ve been falling apart for the last year.”

Ethan Allen sales dropped 24%, as the company said a flood in a Vermont factory and softer demand were among the causes. At Whirlpool, which said in second-quarter earnings that it was moving to make up slowing sales to consumers by selling more appliances to home builders, “discretionary purchases have been even softer than anticipated, as a result of increased mortgage rates and low consumer confidence,” CEO Marc Bitzer said during Thursday’s earnings call. Its shares fell more than 20%. 

Amazon’s $1.3 billion holiday hiring spree

Amazon is making its biggest-ever commitment to holiday hiring, spending $1.3 billion to add the workers, mostly in fulfillment centers. 

That’s possible because Amazon has reorganized its warehouse network to speed up deliveries and lower costs, sparking 11% sales gains the last two quarters as consumers turn to the online giant for more everyday repeat purchases. Amazon also tends to serve a more affluent consumer who is proving more resilient in the face of interest rate hikes and inflation than audiences for Target or dollar stores, according to CFRA retailing analyst Arun Sundaram said.

“Their retail sales are performing really well,” Sundaram said. “There’s still headwinds affecting discretionary sales, but everyday essentials are doing really well.

All of this sets the stage for a high-stakes holiday season.

PNC still thinks there will be a recession in early 2024, thanks partly to the Federal Reserve’ rate hikes, and thinks investors will focus on sales of goods looking for more signs of weakness. “There’s a lot of strength for the late innings” of an expansion, said PNC Asset Management chief investment officer Amanda Agati.

Sundaram, whose firm has predicted that interest rates will soon drop as inflation wanes, thinks retailers are in better shape, with stronger supply chains that will allow strategic discounting more than last year to pump sales. The Uggs sales outperformance was attributed to improved supply chains and shorter shipping times as the lingering effects of the pandemic recede.

“Though there are headwinds for the consumer, there’s a chance for a decent holiday season,” he said, albeit one hampered still by the inflation of the last two years. “The 2022 holiday season may have been the low point.” 

Deloitte predicts soft holiday sales

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