Tag Archives: economic decline

US

Yellen warns of ‘global financial crisis’ if US debt limit agreement isn’t reached

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CNN
 — 

Treasury Secretary Janet Yellen on Friday warned of the widespread global effects that could be felt if the federal government exhausts extraordinary measures and fails to raise the debt ceiling, telling CNN’s Christiane Amanpour about the ways everyday Americans could face stark consequences.

Yellen’s warning comes after the United States on Thursday hit its $31.4 trillion debt limit set by Congress, forcing the Treasury Department to start taking extraordinary measures to keep the government paying its bills.

While those newly deployed extraordinary measures are largely behind-the-scenes accounting maneuvers, Yellen told Amanpour that “the actual date at which we would no longer be able to use these measures is quite uncertain, but it could conceivably come as early as early June.”

Speaking exclusively to CNN from Senegal, Yellen said that after the measures are exhausted, the US could experience at a minimum downgrading of its debt as a result of Congress failing to raise the debt ceiling. The effects of the federal government failing to make payments, she argued, could be as broad as a “global financial crisis.”

“If that happened, our borrowing costs would increase and every American would see that their borrowing costs would increase as well,” Yellen said. “On top of that, a failure to make payments that are due, whether it’s the bondholders or to Social Security recipients or to our military, would undoubtedly cause a recession in the US economy and could cause a global financial crisis.”

“It would certainly undermine the role of the dollar as a reserve currency that is used in transactions all over the world. And Americans – many people would lose their jobs and certainly their borrowing costs would rise,” she continued.

Yellen wrote a letter to House Speaker Kevin McCarthy on Thursday explaining the measures being taken, escalating pressure on Capitol Hill to avoid a catastrophic default.

Hardline Republicans have demanded that lifting the borrowing cap be tied to spending reductions. The White House has countered by saying that it will not offer any concessions or negotiate on raising the debt ceiling. And so far, Yellen’s warnings have failed to spark bipartisan discussion, with both Republicans and Democrats reaffirming their rigid positions over the past week.

As part of the debt issuance suspension period using extraordinary measures, the agency intends to sell existing investments and suspend reinvestments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Also, it will suspend the reinvestment of a government securities fund of the Federal Employees Retirement System Thrift Savings Plan.

No federal retirees or employees will be affected, and the funds will be made whole once the impasse ends, Yellen said in the letter.

“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” she wrote.

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Alan Greenspan says US recession is likely

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New York
CNN
 — 

Former Federal Reserve Chairman Alan Greenspan believes a US recession is the “most likely outcome” of the Fed’s aggressive rate hike regime meant to curb inflation. He joins a growing chorus of economists predicting imminent economic downturn.

His views are particularly important. Not only did Greenspan serve five terms as Fed chair under four different presidents between 1987 and 2006, but he was the last chair to successfully navigate a soft landing, in 1994. In the 12 months that followed February 1994 Greenspan nearly doubled interest rates to 6% and managed to keep the economy steady, avoiding recession.

Greenspan, now 96, said in a note this week that he doubts this current bout of hikes will result in a repeat performance.

The last two months of data showed that prices are beginning to decelerate – good news but not good enough, he said. “I don’t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession,” said Greenspan, now a senior economic adviser to Advisors Capital Management, in commentary released on the company’s website Tuesday.

The Fed hiked interest rates seven times last year, increasing the rate that banks charge each other for overnight borrowing to a range of 4.25%-4.5%, the highest since 2007. Fed officials still expect to raise rates by another percentage point, according to projections released during their December monetary policy meeting.

Wage increases and, by extension, employment, “still need to soften further for a pullback in inflation to be anything more than transitory,” said Greenspan. “So we may have a brief period of calm on the inflation front, but I think it will be too little too late.” Unemployment rates remain near historic lows, holding at 3.7% in November. New employment data is set to be released Friday morning.

Greenspan doubts the Fed will loosen interest rates soon because “inflation could flare up again and we would be back at square one,” he said. “Furthermore, this could potentially damage the Federal Reserve’s credibility as a purveyor of stable prices, especially if the action were seen to be taken merely to protect the stock market rather than in response to truly unstable financial conditions.”

He does see some good news for investors on the horizon. Markets won’t be nearly as chaotic in 2023 as they were last year, he said. “I believe 2022 would be a tough year to top with respect to market volatility,” he remarked.

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Treasury Secretary Yellen predicts major inflation cooldown in 2023

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New York
CNN
 — 

Treasury Secretary Janet Yellen is striking a cautiously optimistic tone about 2023, predicting a major inflation cooldown and stressing that a recession isn’t required to get prices back under control.

“I believe by the end of next year you will see much lower inflation, if there’s not an unanticipated shock,” Yellen told CBS’s “60 Minutes” in an interview that aired on Sunday.

Yellen cited plunging gas prices — AAA said Monday the national average is down by 52 cents per gallon in the past month — tumbling shipping costs and shortening delivery lags.

“I hope that it will be short-lived,” Yellen said of the current period of high inflation. “We learned a lot of lessons from the high inflation we experienced in the 1970s. And we’re all aware that it’s critically important that inflation be brought under control and not become endemic to our economy. And we’re making sure that won’t happen.”

Yellen, like many economists and even the Federal Reserve, has previously been overly optimistic about inflation. She admitted earlier this year that she was “wrong” about the path of inflation, telling CNN’s Wolf Blitzer in June that she “didn’t — at the time — fully understand” the “large shocks to the economy” that would come from Russia’s war in Ukraine.

The comments come after Friday’s hotter-than-expected wholesale inflation report, which showed producer prices increased in November at the slowest annual pace in 18 months.

The more closely watched consumer inflation report due out on Tuesday this week is expected to show a similar cooldown of consumer prices.

The Federal Reserve is widely expected to deliver a seventh-straight interest rate hike on Wednesday, though investors are betting the US central bank will slow the pace of rate increases from three-quarters of a point to half a point. The Fed’s aggressive rate hikes have driven up borrowing costs — credit card rates are at record highs — and raised fears of a recession.

Yellen conceded a recession is possible in the months ahead — though the former Fed chair emphasized that one isn’t required to tame inflation.

“There’s a risk of a recession,” Yellen said. “But it certainly isn’t, in my view, something that is necessary to bring inflation down.”

Like other Biden administration officials, Yellen argued the economy is in the midst of a healthy transition from blockbuster growth to something more sustainable.

“We had a very rapid recovery from the pandemic. Economic growth was very high,” Yellen said. “To bring inflation down and because almost anyone who wants a job has a job, growth has to slow.”

Yellen said the US economy is at or near full employment, meaning it’s “not necessary” for rapid growth to get people back to work.

The Treasury secretary said she tries to instill a sense of compassion and urgency into policymaking by stressing to her staff that real people are suffering.

Yellen recalled how in 2009 when millions of people were out of work in the middle of the Great Recession, she reminded her staff at the San Francisco Federal Reserve, where she was president from 2004-2010, that there are real people behind labor market statistics and economists need to worry about their wellbeing.

“I think I said, ‘They’re f***people,’” Yellen said. “I wanted people that worked for me to take seriously the harm and misery that was being experienced by all too many Americans.”

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Bank of America CEO predicts two years of pain ahead in the housing market

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New York
CNN Business
 — 

The CEO of one of the nation’s largest banks is preparing for an economic downturn in 2023. But he’s also hopeful that the likely recession will be brief and “mild.”

Bank of America

(BAC) CEO Brian Moynihan said in an exclusive interview with Poppy Harlow on “CNN This Morning” Tuesday that there is a lot of uncertainty in the global economy due to the potential US freight railroad strike, Russia’s war with Ukraine and Covid shutdowns in China.

So an economic pullback shouldn’t be a major surprise. But Moynihan told Harlow that the worst-case fears for the economy may not materialize — thanks to the continued resilience of American shoppers.

“That was predicted to happen earlier this year. There was going to be a real slowdown,” Moynihan said. “The Fed was going to raise rates and it’s all pushed out largely because of the US consumer.”

Moynihan’s comments about the economy are decidedly more bullish than some of his peers.

JPMorgan Chase

(JPM) CEO Jamie Dimon said earlier this summer that Americans should brace for an economic “hurricane.” And Goldman Sachs

(GS) CEO David Solomon told Harlow in July that there’s a “good chance” the United States has yet to reach peak inflation.

Still, Moynihan is concerned that there could be more tough times ahead for the housing market. Mortgage rates have skyrocketed this year due to the Federal Reserve’s series of aggressive interest rate hikes. That has made it difficult — if not impossible — for many younger Americans to buy a first home.

“This is the toughest thing. You have to slow down the economy. You have to slow down inflation. And the way you do that is raising interest rates,” Moynihan said. “The intended outcome of [the Fed’s] policies doesn’t feel good when you are trying to buy a home.”

Moynihan told Harlow that there could be two years of pain in the housing market before activity returns to normal.

But despite worries about the housing market, Moynihan said he’s still optimistic that the US economy will continue to lead the global recovery, especially given concerns about China’s recent Covid outbreak and the intensifying protests over the country’s strict lockdown policies.

“I think our economy is holding on better than the rest of the world,” he said.

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Japan’s economy shrinks for first time in a year

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Japan’s economy unexpectedly shrank for the first time in a year in the third quarter, stoking further uncertainty about the outlook as global recession risks, a weak yen and higher import costs took a toll on household consumption and businesses.

The world’s third biggest economy has struggled to motor on despite the recent lifting of Covid curbs, and has faced intensifying pressure from red-hot global inflation, sweeping interest rate increases worldwide and the Ukraine war.

Gross domestic product fell an annualized 1.2% in July-September, official data showed, compared with economists’ median estimate for a 1.1% expansion and a revised 4.6% rise in the second quarter.

It translated into a quarterly decline of 0.3%, versus a forecast 0.3% growth.

On top of being squeezed by a global slowdown and soaring inflation, Japan has been dealing with the challenge of the yen’s slide to 32-year lows against the dollar, which has magnified cost-of-living strains by further lifting the price of everything from fuel to food items.

“The contraction was unexpected,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute, adding that the biggest aberration were the larger-than-expected imports.

“But the three key pillars of demand – consumption, capital expenditure and exports – remained in positive territory, if not robust, so demand is not as weak as the headline figure shows.”

However, the risks to Japan’s outlook have risen as the global economy teeters on the brink of recession.

Economy Minister Shigeyuki Goto said a global recession could hit households and businesses.

At home, policymakers and citizens are bracing for a potential eighth wave of the Covid pandemic, adding to the gloom for private consumption which makes up more than half of the Japanese economy.

In the third quarter, private consumption grew 0.3%, a touch above consensus estimate for 0.2% growth but slowing sharply from the second quarter’s 1.2% gain.

“Growth should turn positive in Q4, amid a rebound in inbound tourism and a smaller trade deficit, but the eighth virus wave and rising inflation will limit the recovery,” said Darren Tay, Japan Economist at Capital Economics.

Tay noted that non-residential investment increased by 1.5% quarter-on-quarter, below consensus of a 2.1% rise and Capital Economics’ own estimate for a strong 3% growth rate.

Exports grew by 1.9% but were overwhelmed by hefty gains in imports, meaning external demand subtracted 0.7 percentage points from GDP.

Prime Minister Fumio Kishida’s government is stepping up support for households to try to ease the effects of inflation, with 29 trillion yen ($206.45 billion) in extra spending in the budget. The Bank of Japan has also maintained its ultra-loose monetary stimulus program to help revive the economy.

Capital Economics’ Tay sees a tough 2023 for Japan.

“As for 2023, Japan will be dragged into a mild recession in H1 by a global downturn that will weigh on exports and business investment.”

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Business

Jeff Bezos’ top tips for managing the economic downturn

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Washington
CNN Business
 — 

Amazon founder Jeff Bezos recently warned consumers and businesses they should consider postponing large purchases in the coming months as the global economy contends with a downturn and faces a possible recession.

The business leader offered his starkest advice yet on a faltering economy in an exclusive sit-down interview with CNN’s Chloe Melas on Saturday at Bezos’ Washington, DC, home.

Bezos urged people to put off expenditures for big-ticket items such as new cars, televisions and appliances, noting that delaying big purchases is the surest way to keep some “dry powder” in the event of a prolonged economic downturn. Meanwhile, small businesses may want to avoid making large capital expenditures or acquisitions during this uncertain time, Bezos added.

If enough consumers follow through with Bezos’ advice, it could mean lower sales for Amazon, the e-commerce giant Bezos founded and that created the vast majority of the billionaire’s wealth.

The New York Times reported Monday that Amazon plans to slash its workforce, laying off 10,000 workers, the largest reduction in the company’s history. That’s in addition to a previously announced hiring freeze in its corporate workforce. The company is second only to Walmart in the number of people it employs in the United States.

Amazon

(AMZN) said in October it expects sales for the final three months of the year to be significantly below Wall Street’s expectations. The weaker forecast came as rising inflation and looming recession fears weigh on consumer purchasing decisions as Americans focus more on travel and dining out and less on buying discretionary goods.

The company’s stock has fallen more than 40% as surging prices and changing customer behavior weigh on Amazon and the broader tech sector.

Bezos said the probability of economic conditions worsening makes it prudent to save some cash if it’s an option.

“Take some risk off the table,” he said. “Just a little bit of risk reduction could make the difference.”

Last month, Bezos tweeted a warning to his followers on Twitter, recommending that they “batten down the hatches.” The advice was meant for business owners and consumers alike, Bezos said in the interview.

Many may be feeling the pinch now, he added, but argued that as an optimist he believes the American Dream “is and will be even more attainable in the future” — projecting that within his own lifetime, space travel could become broadly accessible to the public.

Although the US economy is not, technically, in a recession, nearly 75% of likely voters in a recent CNN poll said they feel as though it is. Wages are up, but not enough to take the sting off inflation, most notably high prices of necessities like food, fuel and shelter. For those invested in stocks, it’s not been a great year, either, and that’s especially hard on retirees who are living off their investments.

Other business leaders have issued similar messages about the economy in recent months. Tesla

(TSLA) and Twitter CEO Elon Musk last month admitted demand for Tesla

(TSLA)s was “a little harder” to come by, and noted that Europe and China are experiencing a “recession of sorts.” Musk also warned that Tesla

(TSLA) would fall short of its sales growth target.

JPMorgan Chase CEO Jamie Dimon in October spooked the stock market by saying a recession could hit the United States in as little as six to nine months.

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US

White House gets ‘Goldilocks’ jobs report as they look to make up ground on the economy

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CNN
 — 

As White House officials prepared for the last jobs report before the midterm elections set to be released Friday morning, the last thing they wanted to see is a blowout hiring number.

It’s the political paradox that loomed over the last major piece of economic data before Election Day – one that comes at a moment that finds Democrats desperately trying to make up ground on the economy.

The US economy added 261,000 jobs in October – more than the 200,000 jobs economists had predicted but still landing in the upper part of the range that White House officials were hoping to see heading into Friday, which was about 150,000-300,000.

It was a “Goldilocks” outcome for the White House – a number that’s not too low, but not too high.

Biden heralded Friday’s jobs report, saying the new data “shows that our jobs recovery remains strong.” He dismissed criticism from Republicans that the economy is headed toward a recession as he continues to receive low marks from voters on his handling of inflation.

“One thing is clear: While comments by Republican leadership sure seem to indicate they are rooting for a recession, the US economy continues to grow and add jobs even as gas prices continue to come down,” Biden said in a statement, reiterating that inflation remains “our top economic challenge.”

It’s a far cry from just one year ago, when the US economy was adding jobs each month at an eye-popping clip: More 650,000 jobs in October and November, close to 600,000 in December, followed two months later by a whopping 714,000 new jobs in February.

President Joe Biden and his economic team have known for months that a cooling of the economy is a necessity to crack the pervasive price increases that have handed a significant advantage to Republicans on the issue which voters consistently cite as most important.

Biden and his top advisers have taken pains since the summer to underscore their rationale for the transition from major job gains to an economic picture defined by “steady and stable” growth.

It’s a message intended to temper expectations after more than a year defined by the rapid pace of hiring, but also a goal viewed by officials as a necessity in order to protect many of the gains they regularly tout.

At its heart is Biden’s most significant economic success: A dramatic jobs recovery from the pandemic-driven economic crisis he walked into on his first day in office. More than 10 million jobs have been added since Biden’s inauguration and the unemployment ticked up from 3.5% to 3.7% on Friday.

The combination of continued job gains and a return to quarterly growth sit at the center of the Biden’s contention that, despite the dour national mood, the US economy is not in or on the precipice of a recession.

“Our economy is strong as hell,” Biden told reporters last month.

The tight labor market, however, has exacerbated the soaring price increases that have imperiled Democrats’ hold on their majorities in the House and Senate. That, in turn, has driven the Federal Reserve to trigger four consecutive jumbo rate increases, including the most recent three-quarters-of-a-point move this week.

Fed Chairman Jerome Powell, in his news conference after the policy announcement, pointed to a labor market that “is just very, very strong” as a central reason the rapid rate increases haven’t tangibly dented soaring prices.

“So it may take time. It may take resolve. It may take patience. It’s likely to get inflation down,” Powell said of the effect of the Fed’s actions. “I think you see from our forecasts and others that it will take some time for inflation to come down.”

Biden has made clear publicly – and to his team privately – that the Fed is an independent entity and won’t face any political pushback from his administration as it attempts to intentionally cool down the US economy.

But White House officials are also keenly aware that the stated goal of a “soft landing” where the central bank manages to significantly tighten economic conditions in order to drive inflation down, but not enough to tip the economy into a painful recession, is a difficult needle to thread.

They do see indications that it’s a possible outcome, however.

“I believe there’s a path to accomplishing that while maintaining a very healthy labor market,” Treasury Secretary Janet Yellen told CNN in an interview. “And I believe we’re on that path.”

But that path includes officials rooting for more modest jobs gains, or clear signs of the “steady and stable” environment that would create more room for the Fed’s difficult task.

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Janet Yellen: Treasury secretary says she’s not seeing signs of a recession in the US economy

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CNN
 — 

Treasury Secretary Janet Yellen said Thursday in an exclusive interview with CNN that she did not see signs of a recession in the near term as the US economy rebounded from six months of contraction.

During a one-on-one interview in Ohio that aired on CNN’s “Erin Burnett OutFront,” Yellen said the third quarter GDP data released Thursday underscored the strength of the US economy as policy makers urgently move to cool off pervasive and soaring inflation that has had a sharp effect on American views of the economy – and endangered the Democratic majorities on Capitol Hill less than two weeks from the midterm elections.

“Look, what we’re seeing right now is solid growth this quarter. Growth has obviously slowed following a very rapid recovery from high unemployment,” Yellen said when asked about whether the latest GDP data assuaged any recession concerns. “We’re at a full employment economy. It’s very natural that growth would slow. And it has over the first three quarters of this year, but it continues to be OK. We have a very strong labor market. I don’t see signs of a recession in this economy at this point.”

Yellen’s optimism comes amid growing concern from economists and finance officials that a recession is likely at some point in the next year, but was based in part on elements of the latest data that showed signs a necessary slowdown in key areas of the economy leaves open a pathway to a “soft landing” as the Federal Reserve prepares to continue its rapid pace of rate increases.

Gross domestic product — the broadest measure of economic activity — rose by an annualized rate of 2.6% during the third quarter, according to initial estimates released Thursday by the Bureau of Economic Analysis. That’s a turnaround from a decline of 1.6% in the first quarter of the year and negative 0.6% in the second.

But Yellen’s view also underscored the complex balancing act President Joe Biden and his top economic officials have attempted over the course of this year, as they seek to highlight a rapid economic recovery and major legislative victories while also pledging to tackle soaring prices.

“Inflation is very high – it’s unacceptably high and Americans feel that every day,” Yellen said when asked how the administration squared its view of the US economy with soaring discontent among voters. Yellen acknowledged that the prices would take time to recede, saying the efforts to bring it back down to levels “that people are more accustomed to” will likely cover “the next couple of years.”

It’s a reality that has undercut efforts by the administrationto take advantage of what officials view as a robust record. Biden, asked about the economy last week, told reporters it’s “strong as hell,” drawing criticism from Republicans.

But Yellen agreed with the President’s assessment that the economy remains strong, standing out in comparison to how other economies around the world are fairing.

“If you look around the world, there are a lot of economies that are really suffering not only from high inflation but very weak economic performance, and the United States stands out. We have unemployment at a 50-year low. … We saw in this morning’s report – consumer spending and investment spending continued to grow. We have solid household finances, business finances, banks that are well capitalized,” she said.

She added, “This is not an economy that’s in recession and we continue to do well.”

Yellen also acknowledged frustration inside the administration that the efforts to pull the US economy out of crisis haven’t received the credit officials believe is merited.

“There were several problems that we could have had, and difficulties many families American families could have faced,” Yellen said. “These are problems we don’t have, because of what the Biden administration has done. So, often one doesn’t get credit for problems that don’t exist.”

Yellen traveled to Cleveland as part of an administration push to highlight the major legislative wins – and the tens of billions of dollars in private sector investment those policies have driven toward manufacturing around the country.

It’s a critical piece of an economic strategy designed to address many of the vulnerabilities and failings laid bare as Covid-19 ravaged the world, with significant federal investments in infrastructure and shoring up – or creating from scratch – key pieces of critical supply chains.

Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.

Yellen pledged that those efforts would be felt as they course through the economy in the months and years ahead. Asked if the administration’s general message to Americans was one of patience, Yellen said: “Yes.”

“But you’re beginning to see repaired bridges come online – not in every community, but pretty soon. Many communities are going to see roads improved, bridges repaired that have been falling apart. We’re seeing money flow into research and development, which is really an important source of long term strength to the American economy. And America’s strength is going to increase and we’re going to become a more competitive economy,” she said.

Yellen also addressed the battle lines that have been drawn this week over raising the debt ceiling, a now-perpetual Washington crisis of its own making that House Republicans have once again pledged to utilize for leverage should they take the majority.

“The President and I agree that America should not be held hostage by members of Congress who think it’s alright to compromise the credit rating of the United States and to threaten default on US Treasuries, which are the bedrock of global financial markets,” Yellen said.

But Yellen, who has long highlighted the “destructive” nature of the showdowns, has also backed doing away with the debt limit altogether through legislation. A group of House Democrats wrote to Democratic leaders to request that action in the lame duck session of Congress, but Biden rejected the idea this week.

Asked about the split, Yellen said only that she and Biden agreed that it’s “really up to Congress to raise the debt ceiling.”

“It’s utterly essential that it be done, and I’d like to see it occur in the way that it can occur,” Yellen added.

As the administration moves toward a time period that traditionally leads top officials to leave an administration, she made clear she did not plan to be one of them. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”

“I feel very excited by the program that we talked about,” Yellen said. “And I see in it great strengthening of economic growth and addressing climate change and strengthening American households. And I want to be part of that.”

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As prices soar, consumers turn to McDonald’s

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New York
CNN Business
 — 

Inflation is relentlessly high and food prices in particular are soaring. In this environment, customers are turning to McDonald’s — even as the burger chain raises its own prices.

In the third quarter, McDonald’s US prices were up about 10% year-over-year on average. Even so, the brand is gaining traction among its less affluent customers, noted CFO Ian Borden during an analyst call Thursday.

“We’re gaining share right now among low-income consumers,” he said.

As food companies raise prices, they are finding other ways to make consumers feel like they’re getting a good deal. Packaged food and beverage makers such as PepsiCo

(PEP) and Coca-Cola

(KO) are offering more serving sizes, hoping that shoppers will shell out for smaller packages because of the lower price tags. Restaurants are focusing on value, hoping that customers will feel they’re getting more bang for their buck even as prices rise.

McDonald’s is “positioned as the leading brand in terms of value for money and affordability,” said Borden. He noted that some cash-strapped customers are shifting from buying meals to purchasing value items.

Some might also be trading down to McDonald’s from more expensive chains or restaurants as menu prices increase at a slower clip than prices in grocery stores. For the year through September, not adjusted for seasonal swings, grocery prices increased 13%, according to the Bureau of Labor Statistics. In that same period, restaurant prices jumped 8.5%.

“We feel very good about … McDonald’s value proposition,” said CEO Chris Kempczinski during the call. “It’s allowed us to push through some of this pricing.”

In the third quarter, sales at McDonald’s

(MCD) US stores open at least 13 months popped 6.1%, thanks in part to the higher prices. Shares rose about 3% on Thursday following the release of the chain’s third-quarter results.

Kempczinski said that McDonald’s is weighing a number of different potential economic situations, but that it is expecting “a mild to moderate recession in the US,” as a base case. “McDonald’s has proven to be successful in just about any business environment,” he noted.

The brand has a history of resilience during periods of economic distress.

“Our business performed well in that last downturn,” Borden said, referring to the financial crisis of 2008 and 2009. “Our expectation is that we are going to perform well in this environment, certainly on a relative basis to our competitors,” he added.

But Borden acknowledged there are differences between the current situation and 14 years ago.

During the financial crisis McDonald’s had a dollar menu and ramped up its McCafe line. Now, though, the chain is facing higher costs for food, packaging and labor. Consumer behavior also has changed — today’s customers are far more interested in delivery.

And even McDonald’s is not immune from the macroeconomic situation. In the third quarter, consolidated revenues fell 5%. The company said that the results were “negatively impacted by foreign currency translation,” pointing to the strong US dollar to explain the decline. In constant currencies, McDonald said consolidated revenues were up 2%.

In addition to higher prices, McDonald’s said that advertising its core menu items has helped boost sales.

Recently, the burger chain has been using promotions such as celebrity meals and adult Happy Meals to create buzz without adding new menu items that can complicate orders.

The adult Happy Meals promotion “re-engaged our fans to our core food, including Big Macs and Chicken McNuggets,” said Kempczinski.

The company has also been creating buzz around its McRib sandwich, positioning its return for a limited time starting October 31 as part of a “farewell tour.” But that doesn’t mean the product is going away forever.

“The McRib is the GOAT of sandwiches on our menu,” Kempczinski said Thursday. Like “Michael Jordan, Tom Brady and others, you’re never sure if they’re fully retired or not.”

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Business

First on CNN: Next spring the economy will sink into a 1990-style mild recession, Fitch says

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New York
CNN Business
 — 

Stubborn inflation and the Federal Reserve’s jumbo-sized interest rate hikes will drive the American economy into a 1990-style mild recession starting in the spring, Fitch Ratings warned on Tuesday.

In a report obtained first by CNN, Fitch slashed its US growth forecasts for this year and next because of one of the most aggressive inflation-fighting campaigns by the Fed in history. US GDP is now expected to grow by just 0.5% next year, down from 1.5% in the firm’s June forecast.

High inflation will “prove too much of a drain” on household income next year, Fitch said, shrinking consumer spending to the point that it causes a downturn during the second quarter of 2023.

Fitch, one of the world’s top three credit rating agencies, assesses the ability of companies and nations around the world to repay their debt, providing key guidance for investors.

The gloomy forecast adds to the growing fear among investors, economists and business leaders that the world’s largest economy is on the verge of a recession — just 2.5 years after the last one.

The silver lining, however, is that the next recession may not be nearly as destructive as the last two major ones.

“The US recession we expect is quite mild,” economists at Fitch Ratings said.

The credit ratings firm argued that the United States enters this difficult period from a position of strength — especially because consumers are not saddled with quite as much debt as in the past.

“US household finances are much stronger now than in 2008, the banking system is healthier and there is little evidence of overbuilding in the housing market,” Fitch Ratings economists wrote.

The Great Recession, which began in late 2007, was the worst downturn since the Great Depression and nearly led to the collapse of the financial system. The Covid recession, beginning in early 2020, caused the unemployment rate to skyrocket to nearly 15%.

By contrast, Fitch Ratings sees the unemployment rate rising from just 3.5% today to 5.2% in 2024. That translates to the loss of millions of jobs, but not nearly as many as those lost during the prior two recessions.

“Fitch Ratings expects a very strong consumer balance sheet and the strongest labor market in decades to cushion the impact of a likely recession,” the report said.

Despite rising recession fears, the job market remains very tight, with the supply of workers failing to keep up with demand for labor. Firings are low, quits and job openings are high.

Fitch says the next recession will likely be “broadly similar” to the one that started in July 1990 and ended in March 1991.

There are intriguing similarities between today and the early 1990s.

Much like today, the 1990 recession occurred after the Fed scrambled to fight inflation by rapidly raising interest rates.

Likewise, that downturn was preceded by a war-fueled oil shock. Back then, it was Iraq’s invasion of Kuwait that drove up gasoline and energy prices for Americans.

Today’s period of high energy prices is linked in large part to Russia’s invasion of Ukraine, a conflict that has also raised food prices.

The 1990-1991 recession helped doom the political fortunes of then-President George H.W. Bush.

In the 1992 race for the White House, Arkansas Governor Bill Clinton blamed Bush’s policies for the recession and a Clinton strategist coined the phrase, “It’s the economy, stupid,” highlighting the importance of that issue for voters.

Recent polls indicate voters today are also intensely focused on the state of the economy. In a New York Times poll published Monday, 44% of likely voters said economic concerns are the most important issue facing America — far higher than any other issue.

Inflation remains the biggest cloud hanging over the US economy. The high cost of living is eroding the value of worker paychecks and souring consumer confidence. Persistent inflation has also caused the Federal Reserve to slam the brakes on the economy by dramatically raising interest rates.

That’s why economists in a separate survey, from The Wall Street Journal, peg the chance of a recession in the next 12 months at 63%, the highest level in more than two years.

JPMorgan Chase CEO Jamie Dimon told CNBC last week that a “very, very serious” mix of challenges is likely to cause a recession by the middle of next year.

Fitch Ratings said there is still the risk of a deeper recession than the one that began in 1990, in part because US companies are carrying more debt relative to the size of the economy than 30 years ago. The report also cited the “highly uncertain” impact of the Fed’s efforts to shrink its $9 trillion balance sheet.

The biggest bright spot in the economy is the jobs market, where the unemployment rate is tied for the lowest level since 1969. However, Fed officials expect the jobless rate to rise in the coming quarters and Bank of America is warning the US economy will lose 175,000 jobs a month during the first quarter of next year.

Even White House officials are conceding a downturn could be in the cards.

President Joe Biden told CNN’s Jake Tapper last week a “slight recession” is possible, though he doesn’t anticipate it.

Transportation Secretary Pete Buttigieg told ABC News over the weekend that a recession is “possible but not inevitable.”

Although risks have clearly increased, a recession is not a foregone conclusion.

No one, not even the Fed, knows exactly how all of this will play out. It’s impossible to say what happens to a $23 trillion economy two years after a once-in-a-century pandemic and in the midst of a war in Europe. There is no playbook for this.

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