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Episode: Shrinking spread

Author: Marketplace
Duration: 00:29:14

Episode Shownotes

Government bond yields are typically lower than corporate ones, since corporations can’t print their own money. The difference between the two is called a spread, and that spread has narrowed in recent months. In this episode, why that shrinking spread is a sign that investors feel optimistic. Plus: Retailers struggle

with excess brick-and-mortar space, nationwide household net worth hits a record high and Vermont ski areas battle climate change.

Full Transcript

00:00:01 Speaker_04
On the program today, bond yields, retail, and then we'll go apple picking. From American Public Media, this is Market Play. In Los Angeles, I'm Kai Rizzo. It is Monday, today, 16 December. Good as always to have you along, everybody.

00:00:29 Speaker_04
The big calendar item this week, of course, amid various and sundry data releases, November retail sales, and an update on inflation among them. The biggie is the Fed meeting tomorrow and Wednesday.

00:00:40 Speaker_04
Expectations are for another quarter percentage point cut, along with some wait and see language from Chair Powell. But even though the Fed has been cutting rates, Something else entirely has been going on in the bond market.

00:00:55 Speaker_04
Over the past couple of months, yields on 10-year government bonds have been going up, and corporate bond yields have been going up too. Marketplace's Justin Ho gets us going with what that is telling us about where things might be going.

00:01:09 Speaker_07
Bond investors like to look at government bond yields and corporate bond yields and compare them. The difference in bond market speak is called a spread.

00:01:17 Speaker_07
For instance, if a 10 year government bond is offering four percent, but a 10 year corporate bonds offering five.

00:01:23 Speaker_17
The difference between those two is one percent. That would be your credit spread for that one bond.

00:01:28 Speaker_07
That's Guy Labar, chief fixed income strategist at Jannie Montgomery Scott. He says spreads exist because corporate bonds typically offer more interest. That's because they're seen as riskier.

00:01:38 Speaker_07
After all, companies don't have treasury departments that can just print money to pay off debt.

00:01:43 Speaker_17
They can try to earn more. Things go wrong from time to time. And so by nature, it has a bit more risk than the government.

00:01:49 Speaker_07
But in the last few months, corporate bond yields have been rising more slowly than government bond yields. Spreads have narrowed. Le Bas says that's a sign that companies aren't looking so risky.

00:01:59 Speaker_07
Profits have generally been solid this year, and many companies expect that to continue.

00:02:04 Speaker_07
Winnie Caesar, global head of strategy at the research company CreditSights, says investors also expect that the new Trump administration will help companies jack up profits even more.

00:02:13 Speaker_18
Investors are looking at the prospects of a looser regulatory environment, the potential for an extension of corporate tax breaks.

00:02:23 Speaker_07
Meanwhile, government bond yields have been rising in a faster clip because demand has slowed down. Caesar says that's a sign the economy is strong, which gives investors a reason to take on more risk.

00:02:34 Speaker_18
When investors are expecting that the economy is going to fare well, they're probably not buying treasuries

00:02:39 Speaker_07
In other words, the narrowing spread between government and corporate bond yields is a sign that investors are feeling pretty optimistic. I'm Justin Ho for Marketplace.

00:02:49 Speaker_04
Wall Street on this Monday, the yield on the 10-year went up, the Nasdaq hit a record, the S&P almost, the Dow eight losing sessions in a row, if you are keeping track, which we are. Details, numbers when we get there.

00:03:26 Speaker_04
There is news of another troubled retailer abroad in the land. Bloomberg is reporting the container store is going to file for bankruptcy protection and join the 49 other retailers that have filed so far this year.

00:03:38 Speaker_04
That is almost double the number from last year. Upwards of 7,000 brick and mortar stores have closed across the country this year, despite consumers continuing to spend, spend, spend. Marketplace's Kristen Schwab looked into what's going on.

00:03:54 Speaker_19
Tell me, how many drugstores are in your town?

00:03:56 Speaker_16
Around where I live, I mean, you can walk from one Walgreens to the other seemingly all day.

00:04:02 Speaker_19
David Swartz in Chicago is a senior equity analyst at Morningstar, and he says Walgreens, CVS and Rite Aid have seen some of the highest store closure rates at retail this year because, in general, the U.S. has too much retail space.

00:04:15 Speaker_16
And that, combined with the rise of online shopping, is forcing these retailers to downsize

00:04:23 Speaker_19
There's also been the rise of inflation and everything that's come with it.

00:04:28 Speaker_19
John Mercer, head of global research at CoreSight, says retailers like the container store that sell furniture or home improvement or anything related to buying a house are hurting.

00:04:38 Speaker_01
So that combination of kind of more muted discretionary spending, softer big ticket spending, pressures from interest rates have really kind of compounded

00:04:48 Speaker_19
And it's all happened during what Mark Cohen, former director of the Retail Studies Program at Columbia, calls a COVID hangover. During the pandemic, many stores got a break on what is one of the most expensive parts of their business, real estate.

00:05:02 Speaker_05
Lease adjustments, rent deferrals.

00:05:06 Speaker_19
They helped keep troubled retailers afloat. And now?

00:05:09 Speaker_05
Those accommodations are pretty much all gone.

00:05:12 Speaker_19
It means businesses that would have probably failed years ago are finally failing now. And commercial real estate owners?

00:05:20 Speaker_05
Those landlords are eagerly looking for new tenants who are apparently signing up.

00:05:26 Speaker_19
It's all part of the churn of retail. Just instead of big lots and Foot Locker, we're getting more Wawa and Aldi. I'm Kristen Schwab for Marketplace.

00:05:56 Speaker_04
While it's not at all true, as you sometimes hear, that we don't make anything in this country anymore, it is very true that manufacturing in America just ain't what it used to be. In 1970, about a quarter of Americans had jobs in manufacturing.

00:06:12 Speaker_04
As of last year, less than 10% of all workers in this economy were employed in factories and the like. So what happened to all those people who lost their jobs when manufacturing fell off an employment cliff?

00:06:25 Speaker_04
Matt Notowadigdo is a professor of economics at the University of Chicago's Booth School, where he studies, among other things, the decline of manufacturing. Matt, thanks for coming on. Thanks for having me.

00:06:35 Speaker_04
With the acknowledgement that this is only a half-hour program, what, broadly speaking, happened to American manufacturing in the last, like, 50-ish years, just to set the table?

00:06:45 Speaker_11
Thanks for the reminder that it's only half an hour. So I would say the broad consensus among labor economists is that the decline in manufacturing comes primarily from two main forces.

00:06:56 Speaker_11
The first is technological changes that have resulted in essentially the automation of work. You could think of manufacturing firms replacing workers with industrial robots, and that's been going on for several decades.

00:07:08 Speaker_11
And then the second main factor is what we call the China shock, which is just simply the sharp increase in Chinese imports started around the early 2000s when China entered the WTO.

00:07:17 Speaker_11
So think of these as being the two main push factors that led to the decline in the demand for manufacturing workers.

00:07:23 Speaker_04
Okay, so on that topic, manufacturing workers, which is why we're here, the BLS, the Bureau of Labor Statistics says, give or take, the American economy has lost seven and a half million manufacturing jobs since 1980. Here's my question.

00:07:35 Speaker_04
Where did they go?

00:07:38 Speaker_11
Yeah, it's a good question. A lot of them, sadly, just left the labor market. So, you know, another fact to keep in mind is that the number of workers, the employment-to-population ratio has been falling for many decades.

00:07:50 Speaker_04
Sorry, layman's terms, employment-to-population ratio, just for those unfamiliar.

00:07:55 Speaker_11
Sure thing. So the employment population ratio is the number of workers that are employed divided by the total population of workers who could be working. Right. And that ratio has gone down by several million over the last couple of decades.

00:08:07 Speaker_11
And a lot of that's coming from declining manufacturing.

00:08:09 Speaker_04
So what happened to these people? I mean, if they left, some of them left the labor force, which I want to follow up on in a second. Some of them didn't though. What kinds of jobs are they doing now?

00:08:19 Speaker_11
Well, when workers lose their job in manufacturing, as I said, a lot of them struggle to get back and finding another job. And if they really struggle to find another job, then they leave the labor force. They don't work. They go to early retirement.

00:08:30 Speaker_11
In some cases, they collect government benefits like Social Security disability insurance. For the workers that have higher levels of education, they tend to just find a way to move out of manufacturing and do something else. Like?

00:08:42 Speaker_11
Well, it's hard to say because we don't have great data tracking workers over time in panel data.

00:08:49 Speaker_11
In some of the research I've done, it looks like some of them took jobs in the sectors that were booming during the housing boom that people might remember. So, you know, remember in early 2000s, 2003, 2004, 2005, house prices were booming.

00:09:02 Speaker_11
Construction was going up a lot. Real estate jobs are going up a lot. It does look like those jobs provided an opportunity for manufacturing workers that had lost their jobs in the early 2000s.

00:09:13 Speaker_04
So it's been a while since this has been in sort of the ether out there, but there was a point in this economy, I'm going to say like 10, 15 years ago, where there was a lot of talk about job retraining programs and government investment in that.

00:09:25 Speaker_04
Did that go anywhere? What happened to that?

00:09:28 Speaker_11
We've been trying job training for a really long time, and it's really hard. It's hard to come up with training programs that look effective when people are older.

00:09:36 Speaker_11
I think the bigger adjustment that's happened is for the workers that are entering the labor force, if they see all these changes that we're talking about, they can start college with a different mentality.

00:09:46 Speaker_11
They could go to college in the first place and try to do something else. That seems like that's been a much bigger factor than retraining, which we don't have a lot of successes to point to, unfortunately.

00:09:58 Speaker_04
Can I ask you about the towns and the people in the towns where these mostly men lost their jobs? You know, much has been made of the Rust Belt and hollowed out American cities and all that.

00:10:10 Speaker_04
What happened to the people in these towns, the families of these, again, I'm assuming mostly men who lost their jobs?

00:10:18 Speaker_11
Well, I mean, one of the sad consequences when you look at people's health outcomes, when workers in manufacturing lose their jobs, suppose there's mass layoffs from like a plant closure, it looks quite bad for people's health.

00:10:31 Speaker_11
So mortality rates spike up, people in middle age, you know, end up being more likely to die prematurely.

00:10:39 Speaker_11
You know, a kind of silver lining that I've seen in more recent research is that when you go and look at the younger generation of people who are observing what's happening around them,

00:10:47 Speaker_11
What we found is that in those areas that are most effective, you see people disproportionately increasing the likelihood to go to college.

00:10:55 Speaker_11
They decide to get a four year college degree rather than just entering the labor force with a high school education. And that turns out to offset some of the income declines that you might have otherwise observed.

00:11:06 Speaker_11
Because as long as the college education pays off, this is an investment that you're making for your lifetime. That provides one way that you can try to adjust to the ongoing manufacturing decline.

00:11:17 Speaker_04
Well, we'll take the silver lining. Matt Notowidigdo at the Booth School in Chicago. Matt, thanks a lot. I appreciate your time. Thanks for having me. The first big test for the ski industry is coming up.

00:11:52 Speaker_04
Christmas week is when most resorts get their first big rush of visitors. But weather sometimes has other plans. For big ski conglomerates like Vail Resorts, which owns ski areas across the United States and in Europe and Australia,

00:12:06 Speaker_04
A lack of snow and or weather cold enough to make snow in one part of the world can be hedged by a good winter someplace else. For smaller, independent resorts, though, spreading the risk like that just isn't an option.

00:12:17 Speaker_04
Instead, they've got to make snow, a lot of snow. But as the planet gets hotter, even that is becoming more challenging. As Marketplace's Henry Epp reports from northern Vermont.

00:12:28 Speaker_15
A few days before Thanksgiving, Mark Nelson had hoped to be making snow at Bolton Valley Resort. He's the independent ski area's snowmaking supervisor.

00:12:37 Speaker_15
But instead, hoses hooked up to air compressors are just blowing air out over the icy ground to keep the system in working order in case the temperatures drop later in the day.

00:12:47 Speaker_09
We call it marginal when the conditions are like this. That's marginal snowmaking.

00:12:55 Speaker_15
At 30 degrees Fahrenheit, this afternoon is just a bit too warm. Since the humidity is high, Nelson says, he'd like to see the temperature drop to 26. Though in a couple spots, they've already covered trails with at least two feet of snow.

00:13:09 Speaker_15
That's a pretty good amount to start with, but we need some more. So what's a good base layer that you're looking for?

00:13:17 Speaker_08
Oh, a couple of feet spread across the whole width of the trail and top to bottom.

00:13:24 Speaker_15
Meaning there's a lot more work to do and not much time to do it. But as soon as it gets cold enough, Bolton is ready, says President Lindsay Delorier.

00:13:32 Speaker_15
Since her family bought the resort in 2017, she says they've spent about a million dollars on their snowmaking system.

00:13:39 Speaker_22
Bought a lot of guns, more hoses, updated pumps, added compressors, which has been totally transformational, to be honest.

00:13:48 Speaker_15
Now the system can get up and running faster and pump out about twice as much snow as it used to, which is becoming essential because, at least anecdotally, she says, the periods when temperatures are cold enough to make snow are getting shorter.

00:14:02 Speaker_22
We're getting these really short windows and we really have to capitalize on it.

00:14:06 Speaker_15
According to a state climate report, Vermont's winters have warmed more than three degrees Fahrenheit over the past century, and the state has lost several weeks when temperatures fall below freezing.

00:14:17 Speaker_15
And across much of the U.S., winter is warming faster than other seasons are. But until recently, ski resorts could counteract that with snowmaking, says Daniel Scott, who's studied climate change and tourism at the University of Waterloo.

00:14:31 Speaker_10
From the 1980s to the 90s and the 90s to the 2000s, Average ski season length across the U.S., all the different regional markets, was actually getting longer. But that's started to change.

00:14:44 Speaker_10
We've seen that shift so that the ski season lengths have stabilized or declined in most regional markets over the last few years. And those declines could get worse, especially for certain resorts.

00:14:55 Speaker_12
The truth is the biggest fight you're fighting is probably altitude.

00:14:59 Speaker_15
Sean Kelly analyzes the ski industry for Bank of America. If more urgent action isn't taken to cut climate warming emissions, he says, lower-lying areas will face the biggest challenges.

00:15:10 Speaker_12
Lower-elevation ski resorts, those are going to be more prone to either melting events or to rain events. And at some point, it's just not going to be worth the sort of incremental investment.

00:15:22 Speaker_15
Lucky for Bolton Valley and Vermont, says President Lindsay Delorier,

00:15:25 Speaker_22
We have a very high base elevation and, you know, we're in the northern part of the state.

00:15:30 Speaker_15
So Delorier says they plan to invest more in snowmaking in the years ahead. But they're spreading out their risk by spending on summer attractions, too, adding mountain bike trails and a wedding venue.

00:15:41 Speaker_15
Still, the real moneymaker, she says, is winter, which means riding the season's inevitable roller coaster.

00:15:47 Speaker_22
We know that we're going to have some thaws. We know it's going to probably rain at some point in December or January and make us all cry. But you kind of get used to it, and you just got to weather through it, and it'll turn around.

00:16:00 Speaker_22
It'll be all right. Usually it is.

00:16:04 Speaker_15
But despite its efforts, Bolton wasn't able to make enough snow to open for Thanksgiving. But then the weather started to cooperate. Temperatures dropped, and they got some real snow, too. Enough to open the first weekend of December.

00:16:16 Speaker_15
In Bolton, Vermont, I'm Henry Epp for Marketplace.

00:16:40 Speaker_04
Coming up.

00:16:41 Speaker_00
The first year we did it, we didn't get a spot. So now I make a reservation in January.

00:16:46 Speaker_04
Early bird gets the worm, right? First, though, let's do the numbers. Dow Industrials down 110 points, a quarter percent, 43,717. The Nasdaq jumped 247 points, one and a quarter percent, a record high, 20,173.

00:16:55 Speaker_04
The S&P 500 gained 22 points, four tenths percent, ended things at 6,074. Big Tech, as I was saying, hit an all-time high for a number of companies, which helped boost the tech-heavy Nasdaq. Tesla accelerated 6.1% today. Apple grew 1.2%.

00:17:19 Speaker_04
Alphabet charged up 3.6% today. Chris and Schwab was telling us about tough times for some retailers. CVS Health dripped 5.6% today. Walgreens Boots Alliance subtracted 2% footlocker. rang up three and two-tenths of 1% today.

00:17:35 Speaker_04
Bonds fell, yield on the 10-year T-note up, as I said, 4.40%. You're listening to Marketplace. You turn to Marketplace for up-to-the-minute news, for stories that show you the connections between global events and your personal economy.

00:18:00 Speaker_04
And you're not alone. Marketplace is the most widely consumed business and economic news program in the country. We're proud to make fact-based journalism freely accessible. And Marketplace investors make it all possible.

00:18:11 Speaker_04
Your year-end donation today will make a real difference in our nonprofit newsroom and in the lives of millions of Marketplace listeners every single day. So please contribute what you can today at marketplace.org slash donate. This is Marketplace.

00:18:27 Speaker_04
I'm Kai Rizdahl. Household net worth, the sum and total of all assets owned by American households minus their debts, is up. And it is up a lot. A new record high. In fact, that's according to the Federal Reserve.

00:18:39 Speaker_04
In the third quarter of this year, $4.8 trillion to the good, to just shy of, in total, $169 trillion.

00:18:49 Speaker_04
The caveat here is that the increase is coming primarily from stock market gains and rising home values, parts of this economy, which, as we know, not everyone participates. And in fact, the increase doesn't seem to be cheering Americans a whole lot.

00:19:01 Speaker_04
Consumer sentiment is, of course, still pretty meh. But as Marketplace's Mitchell Hartman reports, it probably is helping us keep up the spending.

00:19:10 Speaker_14
There's a name for what happens when better-off Americans see lots of plus signs show up in their brokerage accounts, and folks with 401ks see their balances going up, and the cost of homes keeps rising. The wealth effect. Eric Friedman at U.S.

00:19:25 Speaker_14
Bank explains.

00:19:26 Speaker_13
We have this gradual, consistent increase in both home prices as well as the stock market. That's led to people spending more money and the cycle continues. These gains haven't exactly been evenly distributed.

00:19:40 Speaker_14
Take stocks, for instance.

00:19:42 Speaker_13
Top 10 percent of Wealthstrata owns roughly 92 percent of all equities. So that's a very disproportionate gain.

00:19:51 Speaker_14
Still, ever more Americans are getting a bit of a bump as the stock market rises, says Sam Stovall at CFRA Research.

00:19:59 Speaker_03
Stock ownership certainly is much more broad today than it was 20, 40 years ago, because there are 401ks.

00:20:07 Speaker_14
Now, there is a risk here. Consumers could count on their paper profits on stocks and real estate, overspend and get into debt, says Thuan Nguyen at consulting firm RSM.

00:20:18 Speaker_20
It is true that credit card debt hit a new record high in recent quarters, but so did household assets, total income because of the labor market. and the stock market.

00:20:29 Speaker_14
Americans' debt-to-assets ratio is now near a multi-decade low.

00:20:34 Speaker_20
The lower the debt ratio, the better it is for American consumers to keep spending without having to worry about how they are able to afford it.

00:20:42 Speaker_14
Except lower-income Americans with fewer assets are putting more on credit cards and falling further behind. I'm Mitchell Hartman for Marketplace.

00:21:15 Speaker_04
This is a busy time of year. The shopping, the travel, the decorating, the family time, and the festivities. If you're in the Mountain West, though, there is another thing you gotta find time for. Apple picking. Seriously. Not for now, but for next fall.

00:21:32 Speaker_04
KUNC's Ray Sullivan has his story from Colorado, where the arid climate makes apple picking so competitive It's just about time right now to make that orchard reservation for next September.

00:21:44 Speaker_23
Jay Williams is the orchard guide at Yahya Farm and Orchard on the outskirts of Longmont, Colorado, about 30 minutes north of Boulder.

00:21:52 Speaker_24
Down here we've got Golden Delicious and Honeycrisp, another Macintosh tree.

00:21:58 Speaker_23
During the autumn rush, this is her day, orienting visitors before releasing them to frolic among the trees. And she stays busy. Apple pickers come through in 15-minute intervals. Every single time slot is filled.

00:22:13 Speaker_24
where you'll be picking straight down. There's a variety of trees.

00:22:17 Speaker_23
This September morning, she's welcoming three generations of the de Zubla clan, three kids, parents, and grandparents. Eight-year-old Gabe has grand ambitions.

00:22:27 Speaker_06
We're going to make an apple pie.

00:22:29 Speaker_23
As the kids run from apple-heavy tree to apple-heavy tree, their mom Carly confides that this picture of breezy autumnal wholesomeness took some serious type A planning.

00:22:41 Speaker_00
The first year we did it, we didn't get a spot. So now I make a reservation in January.

00:22:47 Speaker_23
January! Forget about Taylor Swift. When autumn comes to Colorado, the hottest tickets in town are at the local pick-your-own orchard.

00:22:56 Speaker_21
It's just demand versus supply.

00:22:59 Speaker_23
Yaya's owner, Sharon Perdue, says she had to start the reservation system years ago just to keep from being overrun.

00:23:07 Speaker_21
Each year, more and more people want to pick my apples.

00:23:10 Speaker_23
About 5,000 people tried to book a spot this autumn. Perdue says that's well more than twice as many as she can accommodate.

00:23:17 Speaker_23
But supply will always lag far behind demand, simply because apple farming is a risky proposition in northern Colorado, where the summers are brutally hot and dry and the growing season notoriously short.

00:23:31 Speaker_21
If I have a crop that produces 50 percent, I consider it a success. like it's not the best climate for apple trees. So why would you do that?

00:23:41 Speaker_23
Even if she wanted to keep up with the apple pickers, Perdue says it's not like new apple trees can suddenly hype up production. They plant a tree five to seven years till you get fruit.

00:23:51 Speaker_23
And according to Colorado State University ag economist Don Thilmany, if opportunities for Colorado apple picking are slim, that's because opportunities for local orchards are disappearing.

00:24:03 Speaker_02
Most of the urban corridor farms, there's nowhere to expand to. So we're just losing agricultural land. It's got the highest development pressure near urban areas where exactly you put a U-Pick farm.

00:24:15 Speaker_23
Apple farmers can charge a premium for the U-Pick experience, but many shy away from the model. It comes with its own costs and liabilities, and Filmini says hospitality takes an entirely different skill set than farming.

00:24:29 Speaker_02
If you do it well, you really do have to manage crowds. Everybody wants to do the apple picking on the same four Saturdays in the fall when the weather's pretty.

00:24:38 Speaker_23
That certainly rings true for Mary Pacini up by the Orchard parking lot. She is more like the rest of us. She did not book an apple picking outing eight full months in advance, but she showed up hoping for a cancellation, and she's out of luck.

00:24:54 Speaker_22
I've tried the last three years, and every time it's too late, it's already full.

00:24:58 Speaker_23
Meanwhile, the forward-thinking de Zublas are soaking up the pretty weather this morning. After about 20 minutes dashing about the orchard, eight-year-old Gabe declares mission accomplished. His sack is full of fruit, more than enough for that pie.

00:25:16 Speaker_23
Before they leave, one last autumn treat, this one from the farm stand.

00:25:21 Speaker_13
Now can we go get an apple donut?

00:25:23 Speaker_06
Yes, we can. Yay!

00:25:26 Speaker_23
And almost as soon as that pie comes out of the oven, it'll be time to make next year's reservation. In Longmont, Colorado, I'm Rae Solomon for Market to Market.

00:25:54 Speaker_04
This final note on the way out today, another nod to the American consumer. I saw this on The Verge. The most popular app in the Apple Store this year, the App Store? Not TikTok, not ChatGPT, Timu, the oh-so-cheap online shopping app.

00:26:09 Speaker_06
Hmm.

00:26:11 Speaker_04
Our daily production team includes Andy Corbin, Nicholas Guillaume, Bria Hollenhorst, Sarah Leeson, Sean McHenry, and Safiya Terenzio. I'm Kyle Risdahl. We will see you tomorrow, everybody. This is APM.

00:26:51 Speaker_04
Your year-end donation today will make a real difference in our nonprofit newsroom and in the lives of millions of Marketplace listeners every single day. So please contribute what you can today at marketplace.org slash donate.