The U.S. economy is enduring a rocky transition from an
exceptionally strong recovery to a steep slowdown as rising inflation and
interest rates weigh on consumers and businesses.
Economic growth surged last year, as consumers unleashed
spending and businesses recovered from the short, deep pandemic recession of
early 2020. But that robust growth is grinding to an abrupt halt as households,
companies and policy makers face deep challenges, with four-decade-high
inflation chief among them.
The Federal Reserve’s preferred inflation gauge rose 6.8% in
June from the year before, the sharpest rise since January 1982, the Commerce
Department said Friday. A separate measure of consumer inflation was up 9.1% in
June from a year earlier. A tight labor market could continue to exert upward
pressure on inflation. Wages and benefits rose 5.1% in the second quarter
compared with the same period a year earlier, the Labor Department said Friday.
That was the fastest rate of increase on records back to 2001, and was led by
better pay for private-sector workers.
The Fed is briskly raising interest rates in an attempt to
slow the economy and inflation, most recently lifting its benchmark rate to a
range between 2.25% and 2.5% on Wednesday.
The central bank’s interest-rate increases have already
dented the housing market and appear to be filtering more broadly into the
economy, having the intended effect of cooling last year’s rapid growth. A
steep decline in residential investment, a pullback in business spending and
weaker inventory restocking contributed to U.S. gross domestic product
shrinking at a 0.9% annual rate from April through June, the second straight
quarter that economic output contracted.
Two straight quarters of shrinking economic output is a
common, but not official, definition of a recession. Regardless, it does raise
concerns about the economy’s trajectory and underscores that the rapid recovery
from the pandemic recession is over, especially as elevated inflation shows few
signs of abating.
“Growth is going to be slowing down this year,” Fed Chairman
Jerome Powell said this week. “I think you pretty clearly do see a slowing now
in demand in the second quarter—consumer spending, business fixed investment,
housing, places like that.”
Consumer-facing companies spoke this week about business
slowing as shoppers retrenched. Walmart Inc. warned that higher prices for food
and fuel were causing consumers to pull back. Procter & Gamble Co.
predicted its slowest sales growth in years, a sign that consumer
belt-tightening was beginning to hit household staples. And Amazon.com Inc.
posted a loss for a second straight quarter, hurt in part by continued weakness
in its core retail operations.
“We are in a very difficult macroeconomic state,” Amazon
Chief Financial Officer Brian Olsavsky said.
Friday’s economic data gives the Fed little reason to
significantly slow its pace of rate increases. But its next policy meeting
isn’t for eight weeks, giving officials multiple inflation and labor-market
reports to study before deciding how much higher to raise rates.
At a press conference on Wednesday, Mr. Powell said “another
unusually large increase” of 0.75 percentage point “could be appropriate at our
next meeting,” but he also said that at some point, the Fed would want to slow
its pace of increases to assess how cumulative rate rises are influencing the
Fed officials pay heavy attention to wage inflation because
they believe rising labor costs can lead to more persistently elevated
inflation. Friday’s Labor Department report on wages “is a print that’s going
to keep Fed officials up at night,” said Omair Sharif, who leads forecasting
firm Inflation Insights LLC.
Wages and salaries for private-sector workers accelerated,
growing 1.6% in the second quarter versus 1.3% during the first three months of
the year. Higher inflation, though, is wiping out worker wage gains. Adjusted
for inflation, wages and salaries paid to private-sector workers fell 3.1% in
the second quarter from a year earlier, the Labor Department said.
Jerry Pugh, who owns 15 locations of suburban Atlanta-based
gym franchise Workout Anytime, said many long-term employees have left for
other industries or higher pay over the past year and a half, keeping the gyms
in constant hiring mode. Mr. Pugh said the facilities need general managers,
sales staff, personal trainers and fitness directors.
“You can still get quality employees, but the price you’re
having to pay is much higher than it was before Covid,” said Mr. Pugh.
“Everybody wants more money than they’ve ever wanted.”
Mr. Pugh’s gyms are paying higher commission rates to
personal trainers than a year ago, and they also are paying trainers $12 to $14
an hour for “floor hours,” in which they try to pull in new members for their
services. That is up from an hourly rate of $10 a year ago. The gyms recently
started offering other incentives, including paying for some high-performing
employees’ personal-training or nutrition certifications.
To offset some of the higher labor costs, the gyms raised
rates for new members by 99 cents a month at the end of last year. The basic
monthly membership price is now $19.99. Mr. Pugh said the company is weighing
another price increase.
Carrols Restaurant Group Inc., which operates more than a
thousand Burger King locations and dozens of Popeyes restaurants, is seeing
some slight easing of wage pressures, a sign more workers could be entering the
While the unemployment rate, at 3.6% in June, is near the
half-century low set just before the pandemic began, the share of adults
working or looking for work remains well depressed. Attracting more workers
could help cool inflation.
Average hourly wages paid by Carrols continue to rise in
excess of 10% annually, but the rate of increase has cooled somewhat in more
recent months, said Anthony Hull, chief financial officer of the Syracuse,
N.Y.-based company. “Hiring pressures are stabilizing as we are seeing an
increase in application flow,” Mr. Hull said on an earnings call.
Companies say they are monitoring consumer behavior and how
inflation is affecting shopping patterns.
“Over the past several months, we have seen many consumers
begin to cut back on discretionary spending, including eating out less at restaurants,”
Hershey Co. Chief Executive Michele Buck said.
Ms. Buck said the candy maker has seen minimal impact across
its portfolio of products, but it started to see more in recent months and
expects such resistance to increase later this year. As a result, the company
is working with retailers on implementing its future price increases.
Higher inflation helped drive an increase in household
spending last month. Consumers boosted their seasonally adjusted spending by
1.1% in June, up from 0.3% increase in May, the Commerce Department said
Friday. After adjusting for inflation, spending was nearly flat as consumers
paid significantly more for gasoline and other energy products in June. Pump
prices have more recently fallen.
Kimberly-Clark Corp., maker of Huggies diapers and Kleenex
tissues, said consumers and businesses paid more for its products but bought
less, sending sales volumes down 1% for the most recent quarter. The company
raised revenue expectations for the calendar year, but predicted that higher
costs for everything from pulp to shipping will eat into profitability more
Looking ahead, Kimberly-Clark CEO Mike Hsu said the company
faces a difficult balancing act in making budget-friendly products available
without pushing consumers toward cheaper alternatives.
“There is a segment of consumers who are trading down, but
it’s not all consumers,” Mr. Hsu said. “We want to be very cognizant that we
don’t move the whole market that way. There are plenty of consumers that,
despite the impact of the economy…they are still looking to trade up.”
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