We decided to borrow and expand upon a few Yogi Berra quotes that seem more applicable now than ever.
“Nobody goes there anymore because it’s too crowded.” Yogi Berra famously said that about a restaurant in St. Louis. Maybe now he would add that it is too expensive along with crowded. Many people are familiar with the long lines at Starbucks#, but it appears that consumers are retrenching a bit after inflation has slowed down, but not reversed. Starbucks recently noted that traffic in the first quarter at its North American stores was down 7% over the prior year while prices were up 4%. Starbucks said that its core customer remains loyal, but the “occasional” customer is becoming rarer. Kraft Heinz# said recently that its quarterly sales fell 1.2% as higher prices and reduced food-stamp benefits in the U.S. weighed on demand. Kellanova#, which makes Pop-Tarts (frosted and unfrosted), said that North American sales volumes slid 5% after the company increased prices by about the same amount.
“When you come to a fork in the road, take it.” Apparently, individuals are picking up less forks when going out. McDonalds# recently said that all income levels of customer are seeking better value. Also, the company’s second quarter trends so far have shown flat year over year sales comparisons and negative traffic trends. Overall, U.S. fast-food traffic declined 3.5% in the first three months of this year compared with the same period in 2023. It does not help that fast food prices in March were 33% higher than 2019 levels, according to the Labor Department.
Comparable same-restaurant sales at Applebee’s dropped 4.6% in the past quarter, compared with expectations of a 2.7% decline. Same-restaurant sales for the chain have declined and missed expectations for four straight quarters. For IHOP, same-restaurant sales were down 1.7%, the first decline in 12 quarters, and missing expectations for a 0.7% drop. Eating out or eating in is consuming a greater portion of the consumer’s monthly budget. Consequently, the personal savings rate in the U.S. has fallen from 5.2% of disposable income a year ago to about 3.2% in March.
“A nickel ain’t worth a dime anymore.” In the last few years, the overall price level per the Consumer Price Index is up over 20% and up 25% for food. Prices for existing single-family homes rose in 93% of 221 markets, as measured by the National Association of Realtors, in the first quarter of this year. The typical home price, at $389,400, is 5% higher this year than a year ago. The CPI for March rose 3.5 percent over the last 12 months. The CPI less food and energy index rose 3.8 percent over the last 12 months. Shelter costs and gasoline drove half of the increase in the overall CPI, but insurance and medical care costs have risen strongly as well.
For savers it has been a much better interest rate environment recently. Yields on money market funds and short duration fixed income have crept toward 5% or better. However, longer term interest rates are currently lower than shorter rates, resulting in an inverted yield curve that has a good track record of predicting recessions. Economic contractions are inevitable parts of the business cycle, though duration and depth matter a lot in terms of impact on consumers, jobs, GDP, and monetary and fiscal responses.
“In theory, there is no difference between theory and practice. But in practice, there is.” High mortgage rates and rising prices for homes suggest housing demand might falter. Applications for mortgages to purchase a home rose 2% in the past week but were still 17% lower than the same week a year earlier. The average contract interest rate for 30-year fixed-rate mortgages on conforming loans is hovering above 7% for loans with a 20% down payment. Affordability is hitting potential buyers hard, as home prices continue to climb, but tight supply is still not keeping up with strong demand.
“It’s tough to make predictions, especially about the future.” To date, 436 S&P 500 companies (85% of the market cap) have reported 1Q results. Reported sales growth has been 4.2% and earnings 4.0%, surprising by +0.8% and +7.9% respectively. S&P500 earnings are projected to increase by 9% for the full year 2024 and by 14% in 2025. Equity markets are forward looking and have been discounting good earnings growth ahead. If stock market valuations are to be sustained, earnings growth needs to continue and rates will need to come down at some point.
“That’s too coincidental to be a coincidence.” The Job Openings and Labor Turnover Survey (JOLTS) report, which measures the ratio of job openings to unemployed workers, surpassed 2 to 1 in 2022, but recently fell back to 1.3. This is closer to normal levels seen prior to the COVID pandemic, and a favorite indicator for the Fed as a measure of labor market tightness. Economic activity in the services sector contracted in April for the first time since December 2022, ending a period of 15 consecutive months of growth as noted by the Services PMI at 49.4 percent. These readings will most likely provide some cover for the Fed’s next moves.
“You can observe a lot just by watching.” The April 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) noted tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes in the first quarter. Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories. For loans to households, banks reported that lending standards tightened across some categories of residential real estate loans while demand weakened for all categories. Also, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). For credit card, auto, and other consumer loans, standards reportedly tightened and demand weakened. On the flip side, Visa# noted healthy consumer spending and cross-border travel to start the year. The trend toward buying experiences over hardgoods appears to be continuing.
“The future ain’t what it used to be.” At the beginning of this year, many pundits and economists expected 6 to 7 interest rate cuts from the Federal Reserve. The Fed has been relatively consistent, suggesting three cuts were possible if inflation attenuated as planned. Now we will be lucky if we get two rate cuts. The Atlanta Fed predicted that Q1 GDP would be closer to 2.7% than the 1.6% reported. Of course, at the beginning of last year a recession was widely predicted by many economists. Sometimes missed predictions work out favorably.
“It ain’t over till it’s over.” Hopefully this cycle of Fed tightening is nearing its end, but employment and inflation data, including next week’s CPI report for April, will continue to dictate the Fed’s response. So far the Fed is holding steady, suggesting no rate increases ahead, likely decreases later this year if all goes to plan, and no repeat of the 1970’s wage-price feedback loop. If inflation ticks back up again as it did in the 1970’s, which we are not forecasting, then it could be déjà vu all over again. Don’t quote me on that.
Birthdays: Singer Billy Joel turns 75, Actress Rosario Dawson turns 45, and Yogi Berra – iconic baseball player, team manager, and wordsmith – would have turned 99 this coming weekend.
Christopher M. Crooks, CFA®, CFP® 610-260-2219