Marketplace - The consumer spending sweet spot

Episode Date: October 30, 2024

Consumer spending has been strong since the post-pandemic-crash economy got back on its feet, and it continues to prop up GDP. But too much spending, as well as too little, could mess with the Federal Reserve’s goals of stable prices and maximum employment. Also in this episode: WNBA players want a contract to match their popularity and brand power, wage growth stays ahead of inflation and farmers are having a down year.

You know that old joke about economists, how they always say, well, on the one hand, but then on the other hand? Yeah, that, but for consumers. From American public media, this is Marketplace. In Los Angeles, I'm Kyle Rizdahl. 30 October today. Good as always to have you along, everybody. We begin on this Wednesday with a question of balance. Our inquiry is prompted by this morning's update on economic growth.

Gross domestic product, we learned, grew at an annualized rate of 2.8% in the third quarter of the year. That makes it two-ish years of a textbook strong economy. Why? Consumer spending, mostly. Which is whence the question of balance comes. Because we want, and honestly we need, consumers to be spending, keeping the economy strong, but not spending so much so as to drive up inflation again. Marketplace's Kristen Schwab looks at finding that elusive sweet spot.

Spoiler alert. The sweet spot for consumer spending? There is no simple answer because the sweet spot depends on what else is happening in the economy. Jonathan Parker is a finance professor at MIT. Ideally, you just want balanced growth. You want growth in investment and consumption. Consumption, the consumer spending part, and investment, business spending, which has also been strong. We produce stuff, we get stuff done, and we put people to work. A stark contrast to the deep pandemic days, when there were too many people chasing too

few goods and not enough workers to get it all done. Julie Smith, an economist at Lafayette College, says a key element to achieving balance is people spending not too little, not too much. I think a lot of that has to do with how they are feeling about the economy. And the latest consumer confidence numbers out this week say, People are generally feeling okay to positive about the economy. Okay to positive might not sound like a glowing review, but it might just be the review the Fed needs,

because it could mean, for instance, that consumers feel confident enough about jobs to keep spending, but not so confident that they're job-hopping for instance, that consumers feel confident enough about jobs to keep spending, but not so confident that they're job-hopping for raises, which increases inflation. Jim Wilcox, an economist at UC Berkeley, says the equilibrium of this moment, it means consumer spending has fallen into that sweet spot. Jim Wilcox, economist at UC Berkeley, says the equilibrium of this moment, it means consumer spending has fallen into that sweet spot. Jim Wilcox, economist at UC Berkeley, says the kinds of consumer growth we're seeing

lately are not going to reignite inflation. Kirsten Schaub Spending that's sort of even-keeled allows the Fed to relax a little, at least for now. Richard Schaub They do not have to hurry to lower interest rates a lot, and nor are they under much pressure to stop lowering interest rates. Kirsten Schaub Which, he he says puts the Fed on track to cut by 25 basis points next week. I'm Kristin Schwab for Marketplace. Wall Street today, GDP, Shmeedeepee.

Traders took issue with a couple of tech company earnings reports. We'll have the details. Yeah, when we do the numbers. Today being the Wednesday before the first Friday of the month, we got some jobs data from the payroll company ADP this morning, from which we learned wage increases have slowed again. ADP says year over year, the median wage gain is 4.6% for people who stay in the same job, 6.2% for people who stay in the same job, 6.2% for people who switch, should you be curious.

The rate of increase has been slowing for a couple of years now, which kind of makes sense. It's one of the side effects of slowing inflation. But here we sit at the far end of 2024. Inflation is mostly dead and the rate of wage gains is still falling. Marketplaces Kelly Wells asked some economists just how low it's likely to go and what that might mean. Kelly Welles The actual wage increase number isn't all

that important, says Bankrate's senior economic analyst Mark Hamrick. Mark Hamrick The magic number is positive with respect to real earnings, real earnings being earnings adjusted for inflation. Kelly Welles Right now, it is positive because those wage increases have been bigger than price increases. Inflation is around two and a half percent. Wage gains, even for folks who stay in the same job, almost twice that. Wages have outpaced inflation for a year and a half now. That's because it's still a workers market, says Nicole Smith.

She's chief economist at Georgetown's Center on Education and the Workforce. Those workers still have the upper hand to make decisions about moving or staying and what types of wages they will accept. Smith says demand for workers, think job openings, is still greater than the supply. Think unemployed people. If you're an employer, you still have to play it safe. the supply, think unemployed people. If you're an employer, you still have to play it safe. Because if you drop those wages too substantially, you run the risk of losing your employees. So wages are growing faster than inflation, even though wage gains have fallen.

Dean Baker says that's a win-win. He's a senior economist at the Center for Economic and Policy Research who says today's job market is a far cry from what we saw two years ago. If wages go up rapidly enough, that will be passed on in prices and we were seeing that. So what's happened is the labor market has normalized. It's still strong. Perhaps even better news, Baker says he thinks this 2% gap of wage gains over inflation could stick around. If you could point to a period of 2% sustained of wage gains over inflation could stick around.

If you could point to a period of 2% sustained real wage growth, you really have to go back to the 60s. So things look pretty good right now. Tomorrow we'll get a look at the employment cost index for the third quarter of this year, a major indicator of economic health for the Fed as it weighs future interest rates. I'm Kayley Wells for Marketplace. In a lot of ways, as Kristin and Kaylee were just telling us, the economy right now seems like it's headed in the right direction. You can recite the specifics as well as I can.

But just because things look good doesn't mean this economy doesn't have any problems, problems that the pandemic both caused and highlighted. Labor shortages, supply chain issues, higher costs, of course, thanks to inflation, also tighter profit margins. As Marketplace's Justin Ho reports for a lot of small business owners, this economy right now feels a little bit off kilter. Like a lot of restaurant owners, Matt Hetrick has had trouble filling positions at his two locations around Annapolis, Maryland. He says over the last few years, even after raising wages, he's had to get creative, running shifts

with fewer managers and cutting down on prep work. There's something as simple as a french fry, right? There's a lot of like places that will cut their own french fries that will fry them several times, do the whole thing. And then there's also the ability to buy frozen fries out of a bag. Which maybe wouldn't go over well in Belgium, but requires a lot less labor. Hetrick says making adjustments like these

is part of the job. But what's difficult, he says, is that many of the challenges that he's had to adjust to over the last few years have subsided a bit, but they haven't gone away. So you have inflation, you have worker shortages, you have access to capital shortages. It doesn't seem to be ending and getting back to a place where it's a reasonable set of challenges.

Hetrick says all that adapting can be exhausting because it's not like he's correcting a tactical error he made, like opening up a business in the wrong location or designing the wrong menu. Instead, the challenges he's dealing with are economic headwinds, just like big companies talk about in their quarterly reports, in which he, as a business owner, has no control over. You can't control how many workers there are in the United States and where they are and what wages they'll take.

And so it feels broken because you're adjusting the things that you weren't doing wrong. Supply chain issues have been sticking around too. Catherine Reynolds handles imports for Palmetto tile distributors in South Carolina. We're starting to see the effects of all the things that have been going on in the Red Sea, the attacks and the container delays. I feel like it's finally starting to catch up with the industry overall. RENOLD says then there was Hurricane Helene and the port strike. She says every supply chain delay pushes up her costs because shipping companies add fees and surcharges for labor and fuel. It just seems we just go from one kind of disaster to the next that's just sustaining these price levels, unfortunately.

Another challenge, RENOLD says, is that demand for tile among her homebuilder clients has been fairly sluggish. She says that could be because of the hurricane or because people are nervous about the election. But a big factor holding your customers back, she says, is the cost of building supplies and construction loans. And as rates haven't come down like they thought they would and basic supplies to build a house, like wood and plumbing, pipes, all of that have stayed higher, they've had to scale back their

tile budget considerably. That means most businesses don't have much leverage to jack up their prices. Last week, a Federal Reserve survey found that businesses in a number of Fed districts said input costs, think labor, supplies, and those shipping surcharges are rising faster than they can raise retail prices. You can't realistically raise a price if you're going to be competing with several hundred other retailers selling the same exact thing at a lower price. That's Jeff Kaley. He owns Worldwide Cyclery, a mountain bike store in Newbury Park, California. He says given the limits on his ability to raise prices, rising expenses are

taking a toll. That's just making our business a lot harder to be profitable and a lot harder to operate and run profitably than it used to be just back five years ago. So he's been cutting back on shipping supplies and how much AC and heating the business uses. He also let go about 10% of his staff. The net result, he says, isn't great for anybody. I feel as if we're not offering as good of value to our customers

and to our staff as we were in 2019. And that's a result of just having to cut corners and pinch pennies everywhere we can in order to keep hanging on. Kaylee says worldwide cyclery is still doing all right, but doing business right now is just harder than it was before the pandemic. I'm Justin Ho from Marketplace. Coming up. You know, we're not going to maybe look to upgrade anything this year.

Sometimes you just got to hold off, right? First though, sure, yes, let's do the numbers. Dow Industrial's down 91 points today, 2 10th percent, 42,141. The Nasdaq off 104 points, about a half percent, 18,607. The S&P 500 ticked down 19 points, about 3 10th percent there, 58 and 13. Google parent company Alphabet posted comfortable quarterly earnings.

Profit was up 35 percent in its cloud business. Alphabet's big spending on artificial intelligence seems to have been a good bet for the tech giant. Google invested some $13 billion on capital projects like data centers in an effort to catch up in, yes, the AI race. Alphabet shares climbed 2 and eight tenths percent. Rival Microsoft gained about a tenth percent today. Kristin Schwab is telling us about consumer spending

and GDP, so some big retailers, shall we? Walmart subtracted four tenths percent today. Costco slid nine tenths percent. Target went the other way, picked up four tenths of one percent. German automaker Volkswagen is having a rough weekend after announcing a 42% drop in year-over-year earnings. The company is struggling due to rising costs in Europe, also because of decline in demand for its vehicles over in China. It's also asking workers to take a 10% pay cut in order to stave off layoffs.

Bonds down, yield on the 10-year T-note, 4.3%. You're listening to Marketplace. 4.3%. You're listening to Marketplace. This podcast is supported by Fundrise. Buy low, sell high. It's easy to say, hard to do. For example, high interest rates are crushing the real estate market right now. Demand is dropping and prices are falling, even for many of the best assets. It's no wonder the Fundrise flagship fund plans to go on a buying spree, expanding its billion-dollar real estate portfolio over the next few months. You can add the Fundrise flagship fund to your portfolio in just minutes and with as little as $10 by visiting fundrise.com slash marketplace. That's F-U-N-D-R-I-S-E dot com slash marketplace. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise flagship fund before investing.

This and other information can be found in the fund's prospectus at fundrise dot com slash flagship. This is a paid advertisement. What do they say? More money, more problems, and way more questions? From your kids, right? But not to worry. Million Bazillion, a podcast from Marketplace, has you covered.

I'm Bridget Bodner, and with my co-host, Ryan Perez, we take you and your young ones on grand adventures and comedic sing-alongs to answer all the questions your little ones have about money. Join us as we explain how banks work, why name brands are more expensive, and what happened to Black Friday sales. Listen to Million Bazillion wherever you get your podcasts. This is Marketplace. I'm Kai Rizdal. We love our cars, we Americans do. What we don't love so much is the money we have to spend to own and drive them. Gas obviously, the prices of some of them also, obviously. And lately, even as inflation overall has been falling, insurance and maintenance costs

have gone through the roof. Marketplace's Mitchell Hartman has our story. Navy Federal Credit Union puts out a quarterly cost of car ownership index, crunching together 11 different expenses from new and used vehicle prices to gas and regular upkeep. Economist Robert Frick says since 2020, the overall cost is up 38 percent, while the consumer price index is only up 21 percent. It's kind of like we can't catch a break with cars.

Vehicle prices soared early in the pandemic, with messed up supply chains and empty dealer lots. Now, says analyst Carl Brower at iccars.com, prices have leveled off, but they're still... Much higher than they were pre-COVID. There's still enough people out there who are ready to buy a new car that you're not really getting a deal.

For automakers, there's little incentive to lower prices, says Garrett Nelson at CFRA Research. They entered into a new labor contract with the union, UAW, last November. And so they're being pinched by much higher labor costs. Also, drivers are now getting dinged by soaring insurance rates, says Robert Frick, up more than 11% last year.

How come? A lot of cars were wrecked from flooding and fires. Cars are more expensive to repair because of electronics. The people who work fixing cars, they got a big pay raise. All this is causing consumers to pull back, says Kayla Bruhn at Morning Consult. For middle-income folks, Trading down to cheaper cars.

While lower-income consumers, Those that already have cars, while lower income consumers, those that already have cars increasingly saying that they're not confident in their ability to make payments. Anyone who bought when the market peaked and wants to sell now is also in trouble, says Karl Brauer, with used vehicle prices falling. Automobiles aren't particularly a good asset, but because they were for about three years there, people got a false sense of reality. He says a lot of people owe more on the vehicle they bought at top dollar than it's worth

today. I'm Mitchell Hartman for Marketplace. We've been talking on and off the past two or three years about the extended moment that organized labor has been having. From individual Starbucks stores to the United Auto Workers to the machinists at Boeing and now the WNBA. The Women's National Basketball Players Association made huge gains in their 2020 collective bargaining agreement. It raised the average pay of a WNBA player

into the six figures for the first time. It guaranteed new benefits like parental leave and it required the NBA, which owns more than half of the W, to increase its marketing spending. But after an historic 2024 season, the players union is opting out of that old CBA. And a year from this week is the deadline to find something new. Marketplace's Samantha Maher has more. 3.3 million people tuned into the New York Liberty's Overtime Championship win against the Minnesota Lynx in this year's WNBA Finals.

It was the most viewers in 25 years. Keitra Armstrong, a professor of sport management at the University of Michigan, says the W has been on a sharp rise since about 2021. But what we saw in the last year, it just catapulted them, I think, to a new level. WNBA games smashed viewership records. Teams sold more tickets and merchandise than ever. And the league inked a landmark $200 million a year meteorites deal. With all this money pouring into the league, Armstrong says it's not surprising the athletes want to revisit their contract.

If you're a part of producing that product, this is a unique moment. This is a unique strategic window of opportunity to capitalize on the energy and the synergy and the momentum. Terri Carmichael Jackson, executive director of the Women's National Basketball Players Association says the athletes are eager to get to the table, even the stars of this year's finals. Nafisa Collier, Rihanna Stewart, I had separate calls with them, you know, round about game three, going into game four, going into game five, they're

saying, okay, when do we get the results of the vote? We're ready. At the top of their contract wishlist, higher player salaries. We're in a hard cap system. And when I mean hard cap, I mean hard, really pretty restrictive. Where even superstar rookies can't crack six figures. And some of the best players in the world play overseas in the offseason to supplement their income.

We've got to address that. And Carmichael Jackson says the next CBA should ensure that players share in the league's growing profits. Under the current agreement, players split less than 10% of WNBA revenue. We've got to look at a revenue share provision that comes a little bit closer to what the NBPA and the NBA have. Where players get more like a 50% cut of league profits. The WNBA Players Union will also bargain for better family planning, child care and retirement benefits, and higher professional standards for things like practice facilities.

The league didn't respond to an interview request, but Jada Mumju, who studies the business of sports at the University of New Haven, says these negotiations come at a busy time of expansion. The league is moving from 40 games to 44 games, moving finals from five games to seven games, moving from 12 teams to 15. With the first of three new teams launching in San Francisco next year. All of these add to the league's inventory. These are all assets that they are selling to corporate partners. Mumju says this should help the players union make their case and prevent an impasse.

Maybe selfishly, I really hope that there's no stoppages that we can't continue watching the exciting games. Mumju has been watching crowds grow at Connecticut Sun Games these last few years. She says the W doesn't want to see that momentum stall with a player strike. I'm Savannah Marr for Marketplace. Crop prices and thus incomes for farmers and growers in this economy the past couple of years have been pretty good. This year though, the U.S. Department of Agriculture is guessing farm income is going to drop 4.5% in an industry where margins are already thin and variables, think crop yields and weather, those variables are plentiful. Will Bauer reports from Harvest Public Media that those economic realities might mean farmers

are more cautious with their spending this year, which could then spill over into the rest of the ag economy. After days of rain, fifth generation Illinois farmer Nick Kohler is finally able to get into his corn fields. Now today is a beautiful day for harvest, nice blue skies. Kohler grows corn, wheat, and soybeans and for the last couple of years crop prices were pretty good, which meant pretty good profits. But this year he's dealing with lower crop prices and thinner profit margins. We're kind of at the necessity purchases right now.

If we need something, we're going to make it work. Kohler starts up his combine to get ready to harvest corn. The combine broke down earlier this fall, but he says with his budget right now, he'd rather fix big equipment like this than trade it in. You know, we're not gonna maybe look to upgrade anything this year. That fiscal caution among farmers, choosing not to buy a new combine or tractor, for example,

is already impacting the ag equipment sector and manufacturers. The biggest player in this space is John Deere, and sales have taken a hit. It's the first year of a downturn. Mick Dobre is an analyst for the financial firm Baird. Dobre has watched as deer's equipment sales drop by 20% in the second quarter this year. In turn, the ag machinery giant has cut production, and that's led to hundreds of layoffs in states

like Iowa and Illinois. This is going to stretch into 2025. It's pretty unlikely to experience a one-year downturn when it comes to farm equipment and demand. That's in part because more and more grain is being grown abroad this year after some recent lulls. Production was way down in Ukraine for a while, same in South America. But now grain growers internationally are producing again, and there's less demand for domestic grain, which means lower prices when American farmers go to sell their grain.

Now this year isn't a disaster for crop prices. It's just the last couple of years had been a boost for farmers. Agricultural economics professor Joe Janssen at the University of Illinois says farm income is returning to more normal levels. It's a situation that obviously is difficult for the farmer because they are getting squeezed. Profitability on the farm is going to be very difficult to come by. Anthony Comegna And less profitability has downwind effects

for farmers. They may not have as many options to expand or make bigger long-term investments, like land purchases. Tim Johnson is an area vice president for Farmers National Company, which specializes in ag real estate. He says when farmers do have the option to expand, they're often buying hundreds of acres at a time. And interest rates are a big deal on big loans. That interest rate really adds up quickly. That truly causes a level of conservatism to come into play. Often farmers can't dawdle on land purchases.

New acres may only become available when a neighbor retires or someone dies, meaning farmers may have to take the risk even when the economics aren't working in their favor. That's why in addition to earning less right now, farmers are in general taking on more debt. Economist Ty Kreitman with the Federal Reserve Bank of Kansas City says that makes sense since farmers don't have as much liquidity these days. The past couple of years, loan demand was sort of subdued because there was a lot of liquidity.

And now we're sort of seeing that liquidity is sort of running down and now we're seeing higher usage of debt. At the same time, there is a bright spot. Federal reserve interest rate cuts should make loans less expensive for farmers. In Godfrey, Illinois, I'm Will Bauer for Marketplace. This final note on the way out today. Don't look now, but reports of a recession in Europe's biggest economy seem to have been premature.

Germany reported its equivalent of GDP today. The economy there grew at a minuscule but very welcome two-tenths of one percent annualized. Unemployment in Germany, by the way, 6.1 percent. Our media production team includes Brian Allison, Jake Cherry, Jessen Dooler, Drew Jostan, Gary O'Keefe, Charlton Thorpe, Juan Carlos Torrado, and Becca Weinman. Jeff Peters is the manager of media production. I'm Kai Rizdal. We will see you tomorrow, everybody. This is APM. What do they say? More money, more problems, and way more questions from your kids, right?

But not to worry. Million Bazillion, a podcast from Marketplace, has you covered. I'm Bridget Bodner, and with my co-host, Ryan Perez, we take you and your young ones on grand adventures and comedic sing-alongs to answer all the questions your little ones have about money. Join us as we explain how banks work, why name brands are more expensive, and what happened to Black Friday sales. Listen to Million Bazillion wherever you get your podcasts.