Good morning. Just a few years ago, if you mentioned the Federal Reserve’s Senior Loan Officer Opinion Survey — even in the FT newsroom — people’s eyes would glaze over by the time you got to the word “officer”. Now that we’re all waiting for a Fed-induced credit crunch, everyone is tossing around the term “Sloos” (which does have a reassuring, northern European sound to it). The latest survey came out yesterday, and was unsurprising: the net proportion of banks tightening credit to business is at recessionary levels — especially for commercial real estate loans. Loan demand looks bad too. Yet there’s no recession. Below, we continue to wrestle with why not. Send us your thoughts: robert.armstrong@ft.com and ethan.wu@ft.com.
When will the consumer fold?
We recently described the US economy as firing on one, extremely powerful cylinder: consumption. As the labour market cools, banks wobble, and shipping goes to pieces, it is natural to wonder how long that last cylinder can keep pumping.
Yesterday came a piece of news suggesting that the mighty US consumer has stopped paying up — for steak. From the second fiscal-quarter results call at Tyson, the meat producer:
Beef is cycling out of historically strong margins that were seen throughout most of fiscal 2021 and ‘22. Cut-out values [the realised price of a beef carcass] across the protein complex are much lower than a year ago. Inflation has also remained elevated and persistent, which has dramatically impacted our cost.
Since inflation began to rise in earnest, many companies have been able to pass on higher input costs to consumers. In beef, Tyson can’t anymore. The problem? “Reduced domestic demand and softer export markets,” even as supply of cattle has been constrained by droughts. The company expects its beef business to run at around break-even this fiscal year; it had a 13 per cent operating margin last year. The shares fell 16 per cent yesterday, to a seven-year low.
This is exactly the kind of demand-driven margin compression scare story that bearish analysts have been telling for months. It should be noted that commodity businesses are complex, and falls in price cannot always be straightforwardly explained by end-consumer demand. Still, the Tyson results got me wondering whether food, an area where many of us splurged in the wake of the pandemic, is where we might see an early pullback — specifically the return of price elasticity of demand.
So I had a quick look through food company earnings calls in recent days, and the result was unequivocal: Tyson is an outlier. Most companies were able to take whopping price increases in the first quarter, and volumes only edged down.
Brinker — the company behind the Chili’s mall restaurant chain — had same-store sales rise 10 per cent in the first quarter, even as traffic fell 4 per cent. The difference was price and sales mix. At AB InBev, North American beer prices rose 5.6 per cent while volumes fell slightly. Kraft has long struggled with sales volumes, and in the first quarter they fell 6 per cent — but price was up 13 per cent, and margins are widening. Most striking, perhaps, Kellogg’s had a 14 per cent benefit to sales from price/mix. Management said it has been surprised by price elasticity remaining well below historical levels.
I could go on, but the story seems to be the same almost everywhere. Food companies up and down the value chain are passing on big — sometime very big — inflation-plus price increases, and consumers are willing to pay. There is precious little evidence of trading down to cheaper alternatives. The important exceptions to date seem to be beef, and dollar stores pulling in more mid-income consumers (or at least aspiring to do so).
Which leads us back to a question that has bugged Unhedged for a while: how much pandemic savings do American households have left, and how fast is it declining? As we have noted before, we are cautious about the savings data from the Bureau of Economic Analysis, the default that most analysts depend on. It works by looking at the trend in disposable income on the one hand, and consumption and other expenditure on the other. The divergence between the two trends is excess savings. The Fed economists, in a much-discussed paper, used the BEA savings flow data to estimate the stock of excess savings.
In a report released last Friday, Robert Sockin of Citibank reiterates a key point. To derive an estimate of excess savings, and therefore households’ extra spending power, the Fed has to make an assumption about what the underlying trend in household savings is. “Excess” savings, in other words, only makes sense in the context of a “normal” savings trend. The Fed used the savings rate from the period 2015-2019, of about 9 per cent, to model that trend. This implies excess savings at about $1.1tn, or 4 per cent of GDP. But if you make a lower trend savings assumption, excess savings and spending power are higher and falling more slowly. Sockin’s punchline is that in 2015-19, savings were abnormally high, so we might want to adjust the Fed’s estimate for excess savings up.
Here is his graphs of the savings rate and the estimated stock of excess savings. “Citi scenario 1” assumes an 8 per cent trend savings rate; “Scenario 2” assumes 7 per cent. These scenarios result in very different estimates of when America’s extra savings will be exhausted:
I’m not pulling for any one of these scenarios. The point instead is to reiterate that savings estimates are very sensitive to underlying assumptions and it’s hard to know which assumption is best. This is why we have to listen carefully to what companies are telling us. And, exceptions like Tyson aside, companies are telling us that the US consumer has plenty of ammo left to fire at any approaching recession.
Walmart’s fiscal first quarter just ended, and it will report the results next week. We will be looking for signs of rising consumer price sensitivity, but we’ll be surprised if they are dramatic.
One good read
The WSJ’s Pulitzer-wining coverage of stock trading by US government officials.