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Episode: The consumer spending sweet spot

Author: Marketplace
Duration: 00:27:21

Episode Shownotes

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.

Full Transcript

00:00:01 Speaker_23
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00:01:27 Speaker_26
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 Market Play. In Los Angeles, I'm Kyle Rizdol. 30 October today.

00:01:54 Speaker_26
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.

00:02:05 Speaker_26
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.

00:02:23 Speaker_26
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.

00:02:39 Speaker_11
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.

00:02:51 Speaker_20
Ideally, you just want balanced growth. You want growth in investment and consumption.

00:02:57 Speaker_11
Consumption, the consumer spending part, and investment, business spending, which has also been strong.

00:03:03 Speaker_20
We produce stuff. We get stuff done and we put people to work.

00:03:07 Speaker_11
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.

00:03:15 Speaker_11
Julie Smith, an economist at Lafayette College, says a key element to achieving balance is people spending not too little, not too much.

00:03:24 Speaker_10
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 OK to positive about the economy.

00:03:37 Speaker_11
OK 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 their job hopping for raises, which increases inflation.

00:03:56 Speaker_11
Jim Wilcox, an economist at UC Berkeley, says the equilibrium of this moment, it means consumer spending has fallen into that sweet spot.

00:04:05 Speaker_15
The kinds of consumer growth we're seeing lately are not going to reignite inflation.

00:04:11 Speaker_11
Spending that's sort of even keeled allows the Fed to relax a little, at least for now.

00:04:17 Speaker_15
They do not have to hurry to lower interest rates a lot. And nor are they under much pressure to stop lowering interest rates, which he says puts the Fed on track to cut by 25 basis points next week.

00:04:34 Speaker_11
I'm Kristen Schwab for Marketplace.

00:04:36 Speaker_26
Wall Street today, GDP, SME, DP. Traders took issue with a couple of tech company earnings reports. We'll have the details. Yeah, when we do the numbers.

00:05:11 Speaker_26
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.

00:05:22 Speaker_26
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 switch, should you be curious. The rate of increase has been slowing for a couple of years now, which kind of makes sense.

00:05:37 Speaker_26
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.

00:05:48 Speaker_26
Marketplace's Kelly Wells asked some economists just how low it's likely to go and what that might mean.

00:05:54 Speaker_30
The actual wage increase number isn't all that important, says Bankrate's senior economic analyst Mark Hamrick.

00:06:01 Speaker_17
The magic number is positive with respect to real earnings, real earnings being earnings adjusted for inflation.

00:06:08 Speaker_30
Right now, it is positive, because those wage increases have been bigger than price increases. Inflation is around 2.5 percent. Wage gains, even for folks who stay in the same job, almost twice that.

00:06:21 Speaker_17
Wages have outpaced inflation for a year and a half now.

00:06:25 Speaker_30
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.

00:06:33 Speaker_31
Those workers still have the upper hand to make decisions about moving or staying and what types of wages they will accept.

00:06:41 Speaker_30
Smith says demand for workers, think job openings, is still greater than the supply, think unemployed people.

00:06:48 Speaker_31
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.

00:06:57 Speaker_30
So wages are growing faster than inflation, even though wage gains have fallen. Dean Baker says that's a win-win.

00:07:05 Speaker_30
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.

00:07:13 Speaker_14
If wages go up rapidly enough, that will be passed down in prices. And we were seeing that. So what's happened is the labor market has normalized. It's still strong.

00:07:23 Speaker_30
Perhaps even better news, Baker says he thinks this 2% gap of wage gains over inflation could stick around.

00:07:31 Speaker_14
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.

00:07:39 Speaker_30
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 Kayleigh Wells for Marketplace.

00:08:16 Speaker_26
In a lot of ways, as Kristen 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.

00:08:25 Speaker_26
But just because things look good doesn't mean this economy doesn't have any problems, problems that the pandemic both caused and highlighted.

00:08:33 Speaker_26
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.

00:08:46 Speaker_05
Like a lot of restaurant owners, Matt Hetrick has had trouble filling positions at his two locations around Annapolis, Maryland.

00:08:52 Speaker_05
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.

00:09:01 Speaker_21
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 the bag.

00:09:12 Speaker_05
which maybe wouldn't go over well in Belgium, but requires a lot less labor. Hedrick says making adjustments like these is part of the job.

00:09:20 Speaker_05
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.

00:09:28 Speaker_21
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.

00:09:40 Speaker_05
Hedrick 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.

00:09:50 Speaker_05
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.

00:10:00 Speaker_21
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 to things that you weren't doing wrong.

00:10:10 Speaker_05
Supply chain issues have been sticking around too. Katherine Reynolds handles imports for Palmetto tile distributors in South Carolina.

00:10:18 Speaker_28
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.

00:10:28 Speaker_05
Reynolds 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.

00:10:40 Speaker_28
It just seems we just go from one kind of disaster to the next. That's just sustaining these price levels, unfortunately.

00:10:47 Speaker_05
Another challenge, Reynolds 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.

00:10:58 Speaker_05
But a big factor holding her customers back, she says, is the cost of building supplies and construction loans.

00:11:05 Speaker_28
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.

00:11:17 Speaker_05
That means most businesses don't have much leverage to jack up their prices.

00:11:22 Speaker_05
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.

00:11:34 Speaker_06
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.

00:11:41 Speaker_05
That's Jeff Cayley. 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.

00:11:53 Speaker_06
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.

00:12:02 Speaker_05
So he's been cutting back on shipping supplies and how much A.C. and heating the business uses. He also let go about 10 percent of his staff. The net result, he says, isn't great for anybody.

00:12:14 Speaker_06
I feel as if we're not offering as good a 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.

00:12:27 Speaker_05
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 for Marketplace.

00:13:03 Speaker_03
Coming up. You know, we're not going to maybe look to upgrade anything this year.

00:13:08 Speaker_26
Sometimes you just got to hold off, right? First, though. Sure, yes, let's do the numbers. Dow Industrial is down 91 points today, 2 tenths percent, 42,141. The Nasdaq off 104 points, about a half percent, 18,607.

00:13:21 Speaker_26
The S&P 500 ticked down 19 points, about 3 tenths percent there, 58 and 13. Google parent company Alphabet posted comfortable quarterly earnings. Profit was up 35% in its cloud business.

00:13:38 Speaker_26
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.

00:13:49 Speaker_26
Alphabet shares climbed 2.8% rival Microsoft. gained about a tenth percent today. Kristen Schwab is telling us about consumer spending and GDP, so some big retailers, shall we? Walmart subtracted four-tenths percent today.

00:14:01 Speaker_26
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 percent drop in year-over-year earnings.

00:14:11 Speaker_26
The company is struggling due to rising costs in Europe, also because of decline

00:14:16 Speaker_26
in demand for its vehicles over in china it's also asking workers to take a ten percent pay cut in order to stave off layoffs bonds down yield on the ten-year t-notes four point three percent you're listening to marketplace

00:14:35 Speaker_22
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00:16:24 Speaker_26
This is Marketplace. I'm Kai Risdahl. 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.

00:16:38 Speaker_26
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.

00:16:48 Speaker_13
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.

00:17:00 Speaker_13
Economist Robert Frick says since 2020, the overall cost is up 38 percent, while the consumer price index is only up 21 percent.

00:17:09 Speaker_16
It's kind of like we can't catch a break with cars.

00:17:12 Speaker_13
Vehicle prices soared early in the pandemic with messed up supply chains and empty dealer lots. Now, says analyst Carl Brower at I see cars dot com. Prices have leveled off, but they're still much higher than they were pre covid.

00:17:27 Speaker_18
There's still enough people out there who are ready to buy a new car that you're not really getting a deal.

00:17:32 Speaker_13
For automakers, there's little incentive to lower prices, says Garrett Nelson at CFRA Research.

00:17:38 Speaker_02
They entered into a new labor contract with the union, UAW, last November. And so they're being pinched by much higher labor costs.

00:17:46 Speaker_13
Also, drivers are now getting dinged by soaring insurance rates, says Robert Frick, up more than 11 percent last year. How come?

00:17:54 Speaker_16
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.

00:18:04 Speaker_13
All this is causing consumers to pull back, says Kayla Bruhn at Morning Consult.

00:18:09 Speaker_13
For middle income folks, trading down to cheaper cars, while lower income consumers, those that already have cars, increasingly saying that they're not confident in their ability to make payments.

00:18:21 Speaker_13
Anyone who bought when the market peaked and wants to sell now is also in trouble, says Karl Brauer, with used vehicle prices falling.

00:18:29 Speaker_18
Automobiles aren't particularly a good asset, but because they were for about three years there, people got a false sense of reality.

00:18:37 Speaker_13
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.

00:19:07 Speaker_26
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.

00:19:20 Speaker_26
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.

00:19:32 Speaker_26
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.

00:19:40 Speaker_26
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 Savannah Marr has more.

00:19:53 Speaker_29
3.3 million people tuned in to the New York Liberty's Overtime Championship win against the Minnesota Lynx in this year's WNBA Finals. 28 years in the making! It was the most viewers in 25 years.

00:20:08 Speaker_29
Keetra 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

00:20:20 Speaker_00
It just catapulted them, I think, to a new level.

00:20:24 Speaker_29
WNBA games smashed viewership records. Teams sold more tickets and merchandise than ever. And the league inked a landmark $200 million-a-year media rights deal.

00:20:36 Speaker_29
With all this money pouring into the league, Armstrong says it's not surprising the athletes want to revisit their contract.

00:20:43 Speaker_00
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.

00:20:55 Speaker_29
Terry 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.

00:21:07 Speaker_08
Nafisa Collier, Breonna Stewart, I had separate calls with them, you know, round about game three, going into game four, going into game five. They're saying, OK, when do we get the results of the vote? We're ready.

00:21:19 Speaker_29
At the top of their contract wish list, higher players' salaries.

00:21:24 Speaker_08
We're in a hard cap system. And when I mean hard cap, I mean hard, really pretty restrictive.

00:21:30 Speaker_29
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.

00:21:42 Speaker_29
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.

00:21:54 Speaker_08
We've got to look at a revenue share provision that comes a little bit closer to what the NBPA and the NBA have.

00:22:04 Speaker_29
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.

00:22:19 Speaker_29
The league didn't respond to an interview request, but Jada Mumjoo, who studies the business of sports at the University of New Haven, says these negotiations come at a busy time of expansion.

00:22:32 Speaker_25
The league is moving from 40 games to 44 games, moving finals from five games to seven games, moving from 12 teams to 15.

00:22:43 Speaker_29
With the first of three new teams launching in San Francisco next year.

00:22:47 Speaker_25
All of these add to the league's inventory. These are all assets that they are selling to corporate partners.

00:22:54 Speaker_29
Mumju says this should help the players' union make their case and prevent an impasse.

00:22:59 Speaker_25
Maybe selfishly, I really hope that there's no stoppage, that we can continue watching the exciting games.

00:23:05 Speaker_29
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's strike. I'm Savannah Marr for Marketplace.

00:23:40 Speaker_26
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.

00:23:47 Speaker_26
Department of Agriculture is guessing farm income is going to drop four and a half percent in an industry where margins are already thin in variables. Think crop yields and weather. Those variables are plentiful.

00:24:00 Speaker_26
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.

00:24:12 Speaker_07
After days of rain, fifth generation Illinois farmer Nick Kohler is finally able to get into his cornfields.

00:24:17 Speaker_03
Now today is a beautiful day for harvest. Nice blue skies.

00:24:21 Speaker_07
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.

00:24:33 Speaker_03
We're kind of at the necessity purchases right now. If we need something, we're going to make it work.

00:24:40 Speaker_07
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.

00:24:53 Speaker_03
You know, we're not going to maybe look to upgrade anything this year.

00:24:57 Speaker_07
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.

00:25:10 Speaker_19
It's the first year of a downturn.

00:25:13 Speaker_07
Mick Dobre is an analyst for the financial firm Baird. Dobre has watched his deer's equipment sales drop by 20 percent in the second quarter this year.

00:25:21 Speaker_07
In turn, the ag machinery giant has cut production, and that's led to hundreds of layoffs in states like Iowa and Illinois.

00:25:27 Speaker_19
This is going to stretch into 2025. It's pretty unlikely to experience a one-year downturn when it comes to farm equipment demand.

00:25:35 Speaker_07
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.

00:25:44 Speaker_07
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.

00:25:57 Speaker_07
It's just the last couple of years have been a boost for farmers. Agricultural economics professor Joe Jansen at the University of Illinois says farm income is returning to more normal levels.

00:26:07 Speaker_09
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."

00:26:17 Speaker_07
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.

00:26:27 Speaker_07
Tim Johnson is an Area Vice President for Farmers National Company, which specializes in agri-real estate. He says when farmers do have the option to expand, they're often buying hundreds of acres at a time.

00:26:38 Speaker_07
And interest rates are a big deal on big loans.

00:26:42 Speaker_01
That interest rate really adds up quickly. That truly causes a level of conservatism to come into play.

00:26:48 Speaker_07
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.

00:27:01 Speaker_07
That's why, in addition to earning less right now, farmers are, in general, taking on more debt. Economist Ty Krightman with the Federal Reserve Bank of Kansas City says that makes sense since farmers don't have as much liquidity these days.

00:27:14 Speaker_04
past couple 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.

00:27:25 Speaker_07
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.

00:27:43 Speaker_26
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.

00:27:54 Speaker_26
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.

00:28:04 Speaker_26
Our media production team includes Brian Allison, Jake Cherry, Justin Dueller, Drew Johnstead, Gary O'Keefe, Charlton Thorpe, Juan Carlos Torado, and Becca Weinman. Jeff Peters is the manager of media production. I'm Kyle Rizdahl.

00:28:17 Speaker_26
We will see you tomorrow, everybody. This is APM. I'm Kyle Risdell, and on How We Survive, we've embedded on the front lines of a fight between the U.S. military and climate change. But that fight's not happening on traditional battlefields.

00:28:47 Speaker_26
Instead, it's at places like the edge of the Arctic Ocean. Oh my God! It's a little windier out here. Just a little. on changing terrain.

00:28:57 Speaker_15
And in state-of-the-art military facilities where I became a lab rat.

00:29:01 Speaker_26
Discover how the U.S. military might shape our climate future.

00:29:05 Speaker_04
Listen to How We Survive wherever you get your podcasts.