You Can Push The Consumer Only So Far
What Will Cause The Fed to Act?
public companies mentioned: ADBE, AMZN, CSGP, GOOGL, MSFT
Companies can push the consumer only so far before something breaks. We have seen the consumer rotate down over the past year or two, whether it was rotating down to discount retailers and grocers, or rotating down at the SKU level within a particular brand (the old steak to ground beef trade).
Speaking of food, prices since 2020 are up far more than what is reported in CPI - a measure that the Federal Government calculates in a manner which understates price increases in order to put downward pressure on annual social security payment increases. Prices across the economy are up, up, up! Therefore, it is hardly a surprise that personal savings rates have come down.
On the Technology side, when I think about my own experience as well as published price lists, companies such as Adobe (ADBE), Amazon (AMZN), Google (GOOGL) and Microsoft (MSFT) have enjoyed annual price increases in the 10-25% range for various software and premium services.
Given the significant, under-reported price increases that have been pervasive across the U.S. Economy, of course it stands to reason that nominal Sales figures and nominal GDP are up! Nominal figures are up largely due to prices increases, less so unit growth. We are starting to see that now as companies report earnings. Price increases can only hide so much. Soon, price increases won’t be sufficient to hide unit declines. Pricing power will disappear for some companies as the recession (yes, “recession”), progresses (CoStar Group, GSGP, for one). The U.S. has been in recession since 2022 in my book.
As consumer weakness becomes more pervasive, it will further penetrate the Enterprise. We have seen Enterprise sales activity slow in the June quarter for Software companies. That situation will deteriorate before it gets better, regardless of what the Fed does with rates between now and December 31st, 2024.
Speaking of the Fed, it is just a question of what will crack first to cause the Fed to move its Fed Funds Rate lower: 1.) Unemployment moving further in the wrong direction? 2.) The Equity market taking a material hit over the next week or two? or, 3.) Something breaking in the credit market?