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  • Writer's pictureRealFacts Editorial Team

RealFacts Weekly Economic Trends Report

Updated: Apr 18














This Week's Topics


Restaurants Struggling: Consumers Choosing to Eat at Home


With restaurant industry prices rapidly inflating, many consumers are choosing to buy food at the grocery store instead of eating out. Grocery store price inflation has begun to moderate recently while restaurant pricing has continued to grow. In an article for Barron’s Evie Liu writes, “According to the latest inflation data for February, prices for food at home increased 1% from a year ago, while the costs for food away from home jumped 4.5%—a gap of 3.5 percentage points. Prices at fast-food restaurants are rising particularly fast, up 7.8% from a year ago in February, compared with a 3.8% jump at full-service restaurants.” Below is a graph from the Bureau of Labor Statistics that Liu uses to show the difference in inflation for the branches of the food industry.



To show the large price increases that fast food companies have been implementing over the last few years Liu quotes data from Deutsche Bank analyst Lauren Silberman, “McDonald’s has raised prices by 28% over the past three years, while its rival Burger King boosted prices by 22.5%. Jack in the Box’s prices have risen around 22%, and Wendy’s have jumped 18%”. The effects of these price increases have been lower foot traffic and customers spending less per visit.


Bloomberg analyst Michael Hagan, Bloomberg Markets, discussed how higher restaurant prices have primarily hurt the lower income class of Americans. Using McDonald’s as the example, Hagan said, “They're definitely having some headwinds with the low-income consumer, they finally fessed up to that consumer coming less often and spending less when they do come. Ordering more frequently off of the dollar menu and things of that nature. The low end consumers are pressed here in the US, we see credit card balances at the highest they’ve ever been.. so we definitely see some pressure on that consumer.”


Lower income Americans, who are generally the most profitable customers for these companies, are suffering greatly from these increasing fast food prices. Foot traffic, check size, and store sales are down across the board for these restaurants.


Source: Bloomberg Markets, Barron’s


GDP Contributing to a Healthy Broadening of The Market


Alix Steel, Bloomberg Markets Reporter, discussed some insightful trends this week that are being observed across the various sectors of the S&P. In reply to the question of whether the market is broadening, she stated, “Over 50% of industrial stocks have hit highs for the year.


That doesn't seem to say it's all about tech, and these are names like GE, Caterpillar, and Eaton, not just Uber which makes up a large part of the Industrial Index. Yes, of course, you do get technology [at about 40%], but even consumer discretionary, looking at just over 30%. Same with healthcare. Same with Financials, all 30% of those stocks hitting 2024 highs… You are seeing a healthier broadening out of the rally, which even if tech is weak, maybe the industry can hold up." These trends suggest that the current market rally isn't solely dependent on large tech stocks and implies that the industry may be able to withstand a slowdown in the tech sector.


In alignment with this broadening of the market, Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets, discussed Gross Domestic Product (GDP) and how it can lead to further broadening. She said, "You're seeing this rapid rise in GDP forecast for this year… When GDP moves above trend and trends about two to two-and-a-half percent or so since the late '70s, that's when small cap, that's when cyclical, that's when value tends to outperform. So we're not there yet. But we're getting there very, very quickly." Cyclical stocks are stocks that tend to fluctuate significantly up and down based on the state of the economy, and if the historical trends that typically accompany GDP growth at around the two to two-and-a-half percent level remain consistent, there could be a shift towards small caps, cyclical, and value stocks outperforming the larger cap companies.


Source: Bloomberg Markets


Hotter Than Expected Producer Price Index (PPI)


Early Thursday morning, before the markets opened, the Labor Department reported its Producer Price Index, commonly known as PPI. This index serves as a key gauge of wholesale inflation across the country. Scott Lehtonen, author at Investors Business Daily (IBD), stated, “The overall PPI rose 0.6% in February, with a 1.6% annual rise. Both were hotter than expected. Economists expected the overall PPI to rise 0.3% in February, with a 1.2% year-over-year increase, according to Econoday.” The unexpected rise in PPI cooled the market, with the Dow falling nearly 0.4%, and the NASDAQ and S&P dipping 0.3%. Small caps in the Russell 2000 tumbled almost 2%, reflecting a negative response to the inflation data. The Russell 2000 has now fallen four of the last five trading sessions.


Lehtonen also reported on other aspects of the Labor Department’s findings by stating, “Further, the Labor Department's initial unemployment claims fell to 209,000 vs. 217,000 from the previous week. They were expected to dip to 215,000. Lastly, U.S. retail sales from the Commerce Department rose 0.6% in February, below the 0.7% estimate, vs. January's decline of 0.8%.” These unexpected numbers hint that inflation may not be slowing down as quickly as many had hoped.


Source: Investor’s Business Daily


Will We See a 2% Consumer Price Index?


The Consumer Price Index (CPI) is a great lagging economic indicator. In the economy, we use economic indicators to measure and understand where the economy has been, where it is, and where it is going. That is why we bucket many of these indicators into sectors labeled as leading, coincident (happening at the same time), and lagging. The CPI looks into the past to measure inflation relative to consumer spending. Using the CPI we can often predict where the economy may go.


From the chart below we can see the CPI bar on the far right from the month of February, it shows that CPI rose slightly to 3.2% which was a surprise since economists expected 3.1%. The six months prior, the , but recently has been bounding between 3% and 4%, which is still higher than the Fed target rate of 2.0%.



Source: U.S. Bureau of Labor Statistics


The Fed wants to move toward its inflation target of 2.0% but hasn’t made much progress since the middle of 2023. Gas and energy, along with housing, have proven to be the big sectors with rising prices. These sectors “contributed over 60% of the monthly increase for all items” in the CPI. … The service sector prices and revenues. These sectors may cause a reversal in the CPI which may cause it to rise instead of fall, if the Fed is not careful. Right now, we’re at a standstill, but everyone knows the Fed will be persistent at reaching its 2% target and pulling off a "soft landing."


The Market reaction to this news was minimal. The S&P 500 went down but came back up and finished possessive for that day. Bond yields also went up as long-term bonds are affected by inflationary risks. It would be great to get to 2% inflation but some investors optimistically believe the market is in a good place and recommend that we should buy. This situation has caused stagflation these past months, with the bears and the bulls duking it out. All indications are the Fed will wait until June before cutting rates, but there is no guarantee.


Federal Open Market Committee To Discuss the Federal-Funds Rate Today


Right now we aren't expecting a cut, we are 95% confident that we will not see one in March. So businesses are looking to kick the can down the road and look for cuts this summer. The graph below shows past Fed-Funds rates and where we stand today.



Source: Federal Reserve


We see borrowing rates above 5%. On March 19-20, 2024, the Federal Reserve is holding its Federal Open Market Committee (FOMC) meeting where it will determine the near term rate.


Upcoming Events


Tuesday & Wednesday, March 19-20: FOMC Interest Rate Decision

Thursday, March 21: Initial Jobless Claims, Philadelphia Fed manufacturing survey, S&P flash U.S. services PMI, S&P flash U.S. manufacturing PMI, U.S. leading economic indicators, Existing Home Sales

Monday, March 25: New home sales

Tuesday, March 26: Durable goods orders, Durable goods minus transportation, S&P Cash-Shiller home price index (20 cities), Consumer confidence

Wednesday, March 27: Initial jobless claims, GDP (2nd revision), Chicago Business Barometer (PMI), Pending home sales, Consumer sentiment (final)


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