Juggling Dynamite

A stream of big companies are guiding down their outlook this week with reference to distressed consumers pulling back. See: Long-predicted consumer pullback finally hits restaurants like Starbucks, KFC and McDonald’s:

Starbucks announced a surprise drop in same-store sales for its latest quarter, sending its shares down 17% on Wednesday. Pizza Hut and KFC also reported shrinking same-store sales. And even stalwart McDonald’s said it had adopted a “street-fighting mentality” to compete for value-minded diners.

For months, economists have been predicting that consumers would cut back on their spending in response to higher prices and interest rates.

On the earnings call yesterday, McDonald’s CEO Chris Kempczinski noted that the weakness is global:

“It is clear that broad-based consumer pressures persist around the world. Consumers continue to be even more discriminating with every dollar that they spend as they face elevated prices in their day-to-day spending…It’s worth noting that in [the first quarter], industry traffic was flat to declining in the U.S., Australia, Canada, Germany, Japan and the U.K.”

At the same time, the Conference Board’s measure of US consumer confidence in April declined for the third consecutive month to its lowest level since mid-2022 as consumer views on the labour market and economy deteriorated. See US Consumer Confidence Slumps to Lowest Level Since July 2022. Consumers drive the majority of economic activity in developed economies. With household saving rates at cycle lows, spending is piling up on credit card balances where interest rates are north of 20%.

Many who bought or refinanced real estate and vehicles when interest rates were at historic lows and prices near cycle highs (2020-2022) are increasingly looking to sell as a cash crunch spreads. A plunge in short-term vacation bookings is intensifying the pressure. See Florida real estate struggles as ‘motivated’ sellers flood market:

“It’s also coming at a time when HOA (homeowner association) fees are going up and insurance costs are going up, and people don’t want to pay these higher property taxes,” Fairweather said. “More new listings are coming on the market right now, too.”

There are more than 5,600 active listings in Florida that include the keyword “motivated” in the description on Zillow.

Government transfers to households and businesses exploded to record highs during the pandemic, while central banks helped push interest rates to all-time lows. This enabled excess spending, inflated the price of goods, services, labour, and assets in most countries at once, and ballooned debt through all levels of the global economy.

Then, central banks hiked interest rates at the greatest rate of change in decades. The result is a public and private sector encumbered with crippling payments that tourniquet the ability to consume, save and invest. In response, companies have begun slashing their labour force, further eroding household spending power. Now, raising cash by cuting overhead, supplementing income and selling assets is an international preoccupation. The great unwind is in motion.

Danielle DiMartino Booth offers a good summary update in the segment below.

Join Danielle DiMartino Booth as she delves into the complexities of inflation. Discover the forces that shape our economy, from Federal Reserve strategies to unprecedented government spending. With Danielle’s clear insights, understand how these factors influence your daily life and financial future. Here is a direct video link.

Hoisington’s First Quarter 2024 Review and Outlook is available here. Always a rich and enlightening economic lesson.

For those who think the impacts of the 2022-23 monetary tightening cycle are over, this concise review is worth a look.

U.S. dollar world liquidity (MWDL) dropped by a record 9% year over year in February as the U.S. Fed’s monetary restraint intensified globally. A deceleration of this nature preceded every recession since 1976.

For the first time since at least 1970, the three-year percentage change in real monthly money supply is negative in the Euro area, the U.S., and the U.K., while Japan is experiencing the slowest growth in 12 years (Chart below) and China is in deflation.

High debt levels and negative Net National Savings (NNS) are reducing rather than boosting economic growth prospects from here:

The contractionary effects of monetary policy and the de-facto negative NNS policy stance of fiscal policy will serve to place increasing downward pressure on inflation and growth.

A sharp 7% rate of decline in vehicle sales in the first quarter is a sign that the deflationary trend in big-ticket consumer goods prices is more likely to gather speed than reverse. The inflation rate will likely undershoot the Fed’s target, and the unemployment rate will move higher than anticipated by the Fed. Inflation and unemployment are lagging indicators, and much of their cyclicality occurs after, not before, recessions end. This declining inflation environment will continue to bring down inflationary expectations and long-term Treasury bond yields.