Date: 2025-03-14 Page is: DBtxt003.php txt00027016
US ECONOMY
WHAT ROLE FOR RECORD PROFITS IN INFLATION?
CNN Opinion: Why Americans are so frustrated with the economy right now
WHAT ROLE FOR RECORD PROFITS IN INFLATION?
CNN Opinion: Why Americans are so frustrated with the economy right now
Heightened debt levels and interest rates mean that consumers are spending more on
interest payments with less left for goods and services ... Joe Raedle/Getty Images
Original article: https://www.cnn.com/2024/06/06/opinions/consumers-spending-high-prices-inflation-peterson-guichard/index.html
Peter Burgess COMMENTARY
Well yes! It is true that with higher interest rates people have to pay more for their debt ... cars, credit cards, mortgage payments (and probably rent), etc. but none of these are the cause of high prices.
I am an old man, but well educated and quite experienced. I was a very young CFO in part because I understood corporate costs and the simple idea that price less cost is profit! By reducing costs the company increases profit. By increasing prices the company increases profit. By doing both, the company earns record profits.
Why is it that stock markets in the United States have been at record levels for a good long time? It is not because the US economy is in a mess but because most companies are earning record profits.
And the reason why US people are unhappy about the economy is because while hig prices are good for company profits big prices are not good for family budgets.
Furthermore ... dominant economic management tool used by the US Federal Reserve is 'interest rate' which is rather like using a 'saw' to bang in a 'nail' ... or perhaps more graphically: 'Shoot everyone on a sinking ship to stop them from drowning!'
Dana M. Peterson and Stephanie Guichard are employed by The Conference Board. According to a Google query, The Conference Board (CB) is a non-profit, non-partisan think tank and business membership organization that provides research and insights to help organizations and society navigate challenges. Founded in 1916 and based in New York, Early in my career I did 'tax returns' as part of my training as a Chartered Accountant. As I recall, in the UK at the time there was an 'excess profits tax' which served to curb 'profiteering' during WWII and in subsequent years when 'shortage' was the norm. Fast forward to these times and the problem of excess profits in the corporate world in handled by 'stock buy-backs'.
I don't know a lot about Peterson and Guichard, but their writing seems to reflect a very limited corporate view of the performance of the socio-enviro-economic system!
Peter Burgess
Written by Dana M. Peterson and Stephanie Guichard
Editor’s Note: Dana M. Peterson is chief economist at The Conference Board. Stephanie Guichard is the organization’s senior economist, Global Indicators. The opinions expressed in this commentary are their own. View more opinion on CNN.
Updated Thu June 6, 2024 12:19 PM EDT,
US consumers see no end to the one-two punch of high inflation and high interest rates — and they cannot take much more of it.
As in previous months, consumers mentioned prices as being top of mind in the latest Consumer Confidence survey from The Conference Board. They also expect both inflation and interest rates to increase over the next 12 months.
While shoppers have had to grapple with elevated prices and interest rates for some time now, this painful combination has started to weigh on their spending. The drag has begun and will likely worsen over the next few months, but probably won’t tip the US economy into a recession.
US consumer spending held up remarkably well throughout 2023, with the post-pandemic spending spree not abating despite high inflation. Consumers dug into their pandemic savings and relied heavily on credit to maintain their spending levels. With almost everyone employed and feeling that there were plenty of opportunities available, this seemed like the right thing to do.
Fast forward to now: Consumers are increasingly stretched. Pandemic savings are depleted. Wage gains are slowing. Household debt is rising rapidly. Heightened debt levels and interest rates mean that consumers are spending more on interest payments, with less left for goods and services.
Also, more households find it difficult to service and repay debt, especially those who have already maxed out their credit cards. Delinquencies are rising, and about a third of maxed-out borrowers have fallen behind in their payments over the last year, according to the New York Federal Reserve.
When asked about their financial situation now and in the future, consumers’ worries have grown since February. More are saying that their financial situation is bad and fewer are expecting it to improve. And for four consecutive months, our Expectations Index — a measure based on consumers’ short-term outlook for their income as well as business and labor market conditions — was in the territory that usually signals a recession is on the horizon.
With inflation persisting, interest rates likely to stay higher for longer and lingering anxiety about the future, it is no surprise that consumers have become more cautious. Retail sales stagnated in April, actually declining month-over-month after adjusting for inflation. Spending on cars, sporting goods and at restaurants was notably weak.
When presenting last quarter’s earnings, major retailers such as Walmart and The Home Depot confirmed the softening trends: Consumers are more hesitant to open their wallets to buy non-essential items and are looking for cheaper substitutes for their usual purchases.
In May, Walmart announced promotions on 7,000 items while Target revealed price cuts on 1,500 items, all in an effort to sustain spending. While this is good news for cash-strapped consumers who, for instance, still pay on average around $3 for a dozen eggs (almost double the price of eggs pre-pandemic), these campaigns won’t be enough to boost consumption. Indeed, services are now more of an inflation driver than goods. Higher prices for housing and utilities, transportation services, insurance premiums and health care are the main factors squeezing consumer finances, according to our analysis.
The spending slowdown is unlikely to abate. Our January Consumer Confidence survey asked consumers how they are planning to respond to high prices and interest rates. They indicated that they want to reduce their indebtedness, postpone spending on items that require financing and try to save more. When asked what type of spending they would cut back on, consumers mostly cited dining out, clothing/fashion items, entertainment and vacations.
These changes in behavior likely contributed to the recent softening in consumption. They will continue to do so until inflation slows further and interest rates start to fall.
While these headwinds are real and will be a drag on the economy for much of this year, they should not be overestimated. Consumers are not so squeezed that they plan to cut essential spending. Moreover, the strong labor market will continue to support incomes. Indeed, our latest CEO Confidence survey suggests persistent strength in the labor market this year. Most executives plan to keep their workforce unchanged or even increase it. Most also plan to raise wages by more than 3% over the next 12 months.
Overall, even if consumers’ ability and willingness to spend remain under duress over the coming months, we do not expect a contraction that would drag the economy into a recession. As the economy slows in the months ahead, we expect inflation to continue decelerating and gradually normalize at the Fed’s 2% target in 2025. Against this backdrop of lower inflation and growth, we expect the Fed to start cutting interest rates toward the end of 2024 — providing some relief to debt-ridden consumers.
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