by tyler | Nov 6, 2023 | CNN, economy
As the scattered patrons hop from one deserted bar to the next, it’s hard to believe the near-empty streets they are zigzagging down were once among the most vibrant in Asia.
It is Thursday evening, a normally busy night, but there are no crowds for them to weave through, no revelers spilling onto the pavements and no need for them to wait to be seated. At some of the stops on this muted bar crawl, they are the only ones in the room.
It wasn’t always this way. It might seem unlikely from this recent snapshot, but Hong Kong was once a leading light in Asia’s nightlife scene, a famously freewheeling neon-lit city that never slept, where East met West and crowds would spill from the bars throughout the night and long into the morning – even on a weekday.
Such images were beamed around the world in 1997, when Britain handed over sovereignty of its prized former colony to China, and locals and visitors alike welcomed in the new era with a 12-hour rave featuring Boy George, Grace Jones, Pete Tong and Paul Oakenfold.
China’s message at the time was that even if change was coming to Hong Kong, its spirit of “anything goes” would be staying put. The city was promised a high degree of autonomy for the next 50 years and assured that its Western ways could continue. Or, as China’s then leader Deng Xiaoping put it: “Horses will still run, stocks will still sizzle and dancers will still dance.”
And for long after the British departed, the dancing did indeed continue. Hong Kong retained not only the spirit of capitalism, but many other freedoms unknown in the rest of China – not just the gambling on horse races that Deng alluded to, but political freedoms of the press, speech and the right to protest. Even calls for greater democracy were tolerated – at least, for a time.
But little more than halfway into those 50 years, Deng’s promise now rings hollow to many. Spasms of mass protests – against “patriotic education” legislation in 2012, the Occupy Central movement in 2014 and pro-democracy demonstrations in 2019 – led China to restrict civil liberties with a sweeping National Security Law. Hundreds of pro-democracy figures have since been jailed and tens of thousands of residents have headed for the exits.
That crackdown and Hong Kong’s fading freedoms have been well-documented, but it is only more recently that a less-reported knock-on effect of China’s crackdown has started to emerge: In the streets and the bars, the trendy clubs and Michelin-starred restaurants, the city that never slept has begun to doze.
Nightlife in the city has become a pale shadow of its heyday as a regional rest and relaxation magnet, when its reputation rested on it being easier to navigate than Japan, less boring than Singapore and freer than mainland China.
Now, apparently in tandem with the diminishing political freedoms, business in the city’s once-thriving bars is drying up. And while some argue over whether politics or Covid is at fault, few dispute that something needs to be done.
Bars earned about $88.9 million in the first half of 2023, 18% less than the $108.5 million brought in during the same period in 2019, according to official data.
In an effort to arrest the decline, the Hong Kong government has launched a “Night Vibes” campaign featuring bazaars at three waterfront areas, splurged millions on a recent fireworks show to celebrate China’s National Day and reintroduced a dragon dance, lit by incense sticks, in its neighborhood of Tai Hang.
Those efforts have attracted a mixture of criticism and mockery – with many pointing out the irony of the campaign’s opening ceremony featuring two white lions, a color associated in Chinese culture with funerals. Meanwhile, the bazaars have been interrupted by a mix of typhoons and security concerns over the use of fireworks.
Still, Hong Kong’s Chief Executive John Lee insists the events are a success, saying at least 100,000 people have checked out the bazaars and that 460,000 tourists from mainland China visited for National Day. And the white lions? Officials say they were “fluorescent.”
A Hong Kong government spokesman told CNN this week that the activities were “well-received by local residents and tourists”. A recent Hong Kong Wine & Dine Festival brought in 140,000 patrons and shopping malls supporting the Night Vibes campaign said they had seen “growth in visitor flow and turnover,” he added.
There are some who point the finger solely at Covid.
“It’s obvious that it’s worse than before. This is the side effect of Covid, which has changed the way of life,” said Gary Ng, an economist with French investment bank Natixis.
And few would dispute that Covid took its toll. During the pandemic, Hong Kong made a virtue of cleaving closely to a mainland Chinese-style zero-tolerance approach that, though not quite as draconian, was still extreme enough to send large numbers of expatriates heading for the exit, with many of them decamping to rival Asian cities like Singapore, Thailand and Japan.
Hong Kong, where incoming travelers faced weeks in quarantine and restaurant tables were limited to two customers, was suddenly the boring one and Singapore – in a telling comparison – the more lively.
Under Hong Kong’s pandemic restrictions, live music was all but banned in small venues for more than 650 days.
But others say Hong Kong is in denial and that its nightlife problems go much deeper than the pandemic. Other places have recovered, they say, why not Hong Kong?
These observers note the city’s response to Covid should itself be seen through the lens of the city’s ever disappearing freedoms.
Months before the virus emerged, China had been tightening its grip on Hong Kong in response to pro-democracy protests that had spread throughout the city.
It introduced restrictions on freedoms – such as of expression and of the press – which were supposedly guaranteed at the time of the handover.
Songs and slogans perceived as linked to the protests were outlawed, memories of past protests scrubbed from the internet, sensitive films censored and newspaper editors charged with sedition and colluding with foreign forces.
The government has maintained that legal enforcement is necessary for Hong Kong to restore stability and prosperity and stop what China says is “foreign forces” from meddling in the city.
“We strongly disapproved of and firmly rejected those groundless attacks, slanders and smears against the HKSAR on the protection of such fundamental rights and freedoms in Hong Kong,” a spokesman said, referring to Hong Kong’s official name, in a reply to CNN.
But, the critics hit back, none of that lends itself to an atmosphere where people will want to sit back, relax and shoot the breeze.
“People may feel like they have to self-censor when having a chat at restaurants or bars because, who knows who may be listening. They may as well stay home for the same chat where they feel safe,” said Benson Wong, one of the hundreds of thousands who have left Hong Kong.
Wong, a former associate professor who specialized in local politics, said he used to enjoy eating out at dai pai dongs – open-air stalls selling Cantonese classics and (usually) plenty of beer – where patrons once talked freely about everything from celebrity gossip to politics.
Now though, he said, “one won’t feel happy if they have to watch everything they say.”
Whether it was Covid or the crackdown, or some combination of the two, an exodus of middle-class Hong Kongers and affluent expats has taken place in recent years.
Last year, the city saw a net outflow of 60,000 residents, its third drop in as many years, taking the number of usual residents down to 7.19 million as of the end of 2022 — a drop of almost 144,000 from the end of 2020.
Tens of thousands of them are Hong Kongers who have taken up special visas and pathways to citizenship offered by Western countries such as Britain, Canada and Australia in the wake of China’s crackdown.
But there has also been a steady drip of departures from the expat population that, like a post-colonial hangover, had remained in the city long after Britain’s departure. They were largely professionals in finance and law with a reputation for working hard and partying even harder, regardless of the politics.
Local media is now awash with reports of banking and law firms relocating their offices, in part or full, to rival financial hubs such as the no-longer-boring Singapore.
Unfortunately for bar and restaurant owners, the two demographics leaving are among their biggest customers.
“The expats have relocated, as well as [Hong Kongers] with a higher income. Their departure of course will have an impact,” said Ng, from Natixis.
Increasingly, these two groups are being replaced by people from mainland China, who now account for more than 70% of the 103,000 work or graduate visas granted since 2022, according to the Immigration Department. The newly dominant migrants, economists point out, tend to have very different spending habits.
Yan Wai-hin, an economics lecturer at the Chinese University of Hong Kong, said the city’s previously robust nightlife was propped up largely by a base of expats and middle-class locals steeped in the time-honored drinking culture of enjoying a nice cold one after a long day.
“The makeup of the population is different now,” Yan said. “Now we have more immigrants from the mainland, and they tend to love to go back to mainland China to spend instead.”
At Hong Kong’s most famous nightlife district, Lan Kwai Fong, the music may be fading, but it hasn’t stopped completely.
The area was long synonymous with jam-packed streets of revelers who would spill out from the bars as the air filled with the sounds of boisterous chatter, clinking glasses and dance music blasting away late into the night.
But during a recent visit by CNN, there was little to distinguish the area from any other street.
“It has been very challenging so far and it has not got back to normal by a long shot,” said Richard Feldman, who runs the gay bar Petticoat Lane at the California Tower in Lan Kwai Fong.
The chairman of the Soho Association, who has been running businesses in the city for more than three decades, Feldman said business was slightly better between Friday and Saturday than weekdays and shops with a good reputation have been less affected.
But across the board, he too said the number of Western faces were dwindling in what was once a favored expat haunt.
“It was a mix of expats and local professionals who would go out for drinks and a late night dance. But that demographic has eased quite a bit in the past year,” said another bar owner Becky Lam. “We are getting more mainland customers.”
Lam, joint founder of a number of Hong Kong bars and restaurants, including wine bar Shady Acres in Central, said while mainland Chinese were willing to spend, they tended to gravitate towards restaurants rather than bars and were less likely to stay out late.
On a weekday, she said, the bars she runs have been getting only half of the customers compared to pre-pandemic days.
“They’ll settle for the Happy Hours and that’s it. We are not talking about 2 a.m. to 3 a.m.,” she said.
There are other problems gnawing away at the nightlife sector.
“People’s habits have changed since Covid, as many are so used to staying at home watching TV and Netflix,” Feldman said.
During the pandemic, Hong Kong imposed a lengthy ban on bars and dine-in services to stem social gatherings, in what many saw as a nod to mainland China’s “zero-Covid” strategy.
This affected shops and malls, which shortened their business hours due to the lack of customers. In many cases, those shortened hours have now become the new normal, with some shops now closing as early as 9 p.m. as opposed to the pre-Covid standard of 10:30 p.m.
Also conspiring against the city’s nightlife is a strong Hong Kong dollar compared to the Chinese yuan, which affects how both Hong Kongers and potential tourists spend their money.
“People from the mainland are less likely to come here to shop, while people in Hong Kong are going to Shenzhen to spend their money,” said Marco Chan, head of research at real estate and investment firm CBRE.
While mainland tourists now think twice about coming to Hong Kong, many Hongkongers have been spending their weekends in mainland China, where many services come at a fraction of the price, Chan said.
Known as the “Godfather of Lan Kwai Fong,” Allan Zeman – the entrepreneur who turned the small square in Hong Kong’s Central district into a renowned nightlife hub – cuts a more optimistic figure than most and insists business is not as bad as it appears.
He estimates mainland Chinese customers now account for 35% of the patrons in Lan Kwai Fong and says they are big spenders.
“They’ll go up to a club, like the California Tower on the roof, and they’ll spend like 400,000 to 550,000 Hong Kong dollars ($51,000 to $70,000) just for drinks,” he said.
His take is that it is Hong Kong’s strong currency and a relative lack of incoming flights compared to the pre-Covid era that are stalling the city’s comeback. “I think it’s temporary,” he said.
But bar owner Lam said Hong Kong needs to reexamine its regulatory approach, if it is to thrive at night once more.
Lam pointed to a drive in recent years by the authorities to remove the city’s famous neon lights in the name of safety as an example of the current misguided approach, saying Hong Kong’s most defining nighttime icons were being dismantled one sign at a time.
She also said her bar, Shady Acres, had been told to serve customers only indoors and shut all doors and windows after 9 p.m. as part of its licensing requirement.
“These kinds of hurdles are really big in Hong Kong,” Lam said. “But I look at our neighboring cities like Bangkok, Shanghai and Taipei. These cities have an exciting nightlife as they really make it late night fun with music, street art and late night dining.”
Feldman, of Petticoat Lane, had another suggestion. “Hong Kong used to be a far more international destination. Now it is a domestic destination,” he said.
The city, said Feldman, should “do everything it can to attract people not only from China but from all over the world.”
by tyler | Oct 25, 2023 | CNN, economy
Danielle Foskie is among a growing number of Americans who have stumbled into a credit card doom loop.
Foskie, a registered dental hygienist who lives outside of Cleveland, Ohio, couldn’t pay the bills when Covid-19 interrupted business at the dentist office where she works. She turrned to credit cards to get by, eventually racking up $60,000 in credit card debt.
“The stress was very intense. I’ve never found myself in such a situation,” Foskie told CNN.
She’s not alone.
In 2022, about one in 10 (9.9%) general purpose credit card accounts in the United States were in “persistent debt” — a difficult-to-escape situation where borrowers are charged more in interest and fees than they pay down in principal, according to a new Consumer Financial Protection Bureau report shared first with CNN.
That’s up from 8.4% in 2021, a trend that the CFPB blames on shrinking paychecks (after adjusting for inflation) and rising borrowing costs.
“People get into this situation they can’t get out of. The fees and interest keep people trapped there,” a CFPB official told CNN.
Americans were hit with $105 billion in credit card interest last year alone, according to the CFPB’s biennial consumer credit card report. That includes $30.5 billion in the fourth quarter, the highest since at least 2015.
Roughly one in three cardholders with the lowest credit scores — subprime and deep subprime — were in persistent debt last year, according to the CFPB. That’s up from around 25% in 2021 and approaching pre-Covid levels.
CFPB officials expect the number of Americans stuck in this doom loop will go even higher in 2023.
“The industry uses rewards to get you in. You think you’re going to pay everything off every month, but sometimes things don’t go as planned,” the CFPB official said. “If you start carrying a balance, you have to pay a hefty price.”
Credit cards are among the most expensive ways to borrow — especially these days.
The Federal Reserve’s war on inflation, marked by aggressive interest rate hikes, has lifted credit card rates to record highs, according to Bankrate.com.
Yet Americans have continued to rely on credit cards as they grapple with a high cost of living. US credit card balances surpassed $1 trillion during the second quarter of this year for the first time ever, according to the New York Fed.
The CFPB said interest charges have grown since mid-2021 as Americans spent more on credit cards, balances grew and borrowing costs climbed.
The CFPB report contained some warning signs suggesting that some consumers are facing financial pressure even as unemployment remains historically low.
For instance, for the first time, quarterly late fees topped $4 billion during the fourth quarter of last year, according to the report.
Annual late fees jumped by 28% in 2022 to $14.5 billion, returning to pre-Covid levels, the CFPB said.
Americans with lower credit scores were hit the hardest by late fees.
Even though consumers with deep subprime credit scores hold just 6% of card accounts, they generated 28% of all late fees last year, the CFPB said. (By contrast, consumers with the highest credit scores generated just 6% of late fee volume).
Earlier this year, the CFPB unveiled a proposed rule that would cap credit card late fees at $8, down sharply from the 2022 average of $32.
A significant number of Americans are only making the minimum payment on their credit card debt, a situation that can drastically increase the overall cost of borrowing and how long it takes to pay it all back.
About 13% of general purpose credit card accounts and 17% of private label accounts paid only the minimum payment due each month in 2022, according to the CFPB report.
Nearly one in three (31%) of subprime private label accounts make just the minimum payment. (There are no comparisons to previous years as this is the first time the CFPB tracked this metric).
Renee Barrett, a 48-year-old mother of twins from the Bronx, found herself making just the minimum payments when she decided to make a career change during the pandemic.
“When I got fed up with the work I was doing and resigned, I had no savings to fall back on,” Barrett said.
Eventually, Barrett accumulated $10,000 in credit card debt on top of $40,000 of student debt.
Barrett urged others to “never, ever” turn to credit cards to get by unless they know with “absolutely certainty” it can be repaid.
As signs of consumer stress emerge, the credit card industry continues to perform well financially.
Credit card issuer profitability took a hit in 2020 during Covid but rebounded sharply in 2021 and last year remained at or above 2019 levels, the CFPB found. The report also warned of an “apparent lack of competition” on credit card rates.
“Credit remains widely available and card issuers are profiting handsomely,” CFPB Director Rohit Chopra told CNN in a statement. “It’s critical that we inject more competition in this market so that Americans can switch their card balances to lower rates.”
by tyler | Oct 25, 2023 | CNN, economy
The Israel-Hamas war is likely to hurt other economies in the Middle East, including Egypt, Lebanon and Jordan, International Monetary Fund (IMF) managing director Kristalina Georgieva said Wednesday.
“The channels of impact are already visible,” she told CNN’s Richard Quest at the Future Investment Initiative — dubbed “Davos in the Desert” — in Saudi Arabia.
Tourism will likely take a hit, and the cost of insuring the movement of goods will go up. Investors will also be more cautious about traveling to the region, and there is a risk of higher numbers of refugees in countries “already accepting more,” she added.
The IMF sees an “incredibly resilient world economy, but jittery and more so,” as a consequence of the war, Georgieva said.
Her comments highlight that the economic fallout from the war is only likely to grow, even as financial markets remain relatively sanguine about the consequences for now.
After an initial spike following Hamas’ brutal attack on Israel on October 7, oil prices have pulled back and remain well below the September highs reached when output cuts by Saudi Arabia and Russia gripped markets.
Meanwhile, yields on US government debt, which move opposite prices, are hovering around highs not seen in over a decade, indicating there’s yet to be a resurgence of a brief flight to safety that took place in the immediate aftermath of the Hamas attack.
While Wall Street has largely brushed off the war, the United Nations Conference on Trade and Development (UNCTAD) warned Wednesday of dire consequences for the already hobbled “Palestinian economy,” referring to Gaza and the West Bank, including East Jerusalem.
“It’s very difficult to make a proper assessment [of the damage]… [but] it’s going to be in the tens of billions of dollars,” Richard Kozul-Wright, director of UNCTAD’s globalisation and development strategies division told reporters.
“The vicious circle of destruction and partial reconstruction must be broken by negotiating a peaceful solution based on international law,” he said, quoting directly from a report the UN agency published last month.
Gross domestic product in the Palestinian economy grew by 3.9% in 2022.
But it remains sharply below its pre-pandemic level on a per capita basis, according to the report, which highlighted “persistent challenges,” including endemic poverty and declining foreign aid.
After accounting for inflation, GDP in Gaza was close to its lowest level since 1994.
“Living in Gaza in 2022 meant confinement in one of the most densely populated spaces in the world, without electricity half the time, and without adequate access to clean water or a proper sewage system,” UNCTAD said in a statement Wednesday.
Despite rising risks in the region from the war, Saudi Arabia’s annual investment conference has drawn scores of top names on Wall Street, several of whom sounded a gloomy note on the global economy during a discussion Tuesday.
These sentiments were echoed by Georgieva who said that the war is happening at a time when “growth is slow,” interest rates are high and public debt has increased, after governments spent big to cushion the blow to their economies from the Covid-19 pandemic and the Ukraine war.
“Our call to everybody is, buckle up. Make sure that you understand [higher] interest rates are here to stay for longer,” she said, pointing to the fact that inflation was not falling fast enough.
“What we are projecting is inflation to stay above 2% through [2024] maybe even somewhat in [2025], and only then we would see interest rates moderating to where they should be: in positive territory but not so high.”
— Winston Lo contributed reporting.
by tyler | Oct 18, 2023 | CNN, economy
Americans’ net worth surged at a historic pace from 2019 to 2022, a reflection of the pandemic era’s tremendous economic swings and the wealth generated from homeownership and financial assets, according to Federal Reserve data released Wednesday.
Real median net worth swelled by 37% in 2022 from the pre-pandemic 2019, according to the Fed’s latest Survey of Consumer Finances, a triennial survey that’s been conducted since 1989 to comprehensively measure income, net worth, credit use, debt and other financial outcomes for American families.
Although backwards-looking, the Fed report details the financial foundation behind the continued resilience that’s fueled US economic growth and jettisoned recession predictions.
However, the latest iteration of the survey also showed that income inequality widened and housing became increasingly unaffordable during this most recent three-year period, reinforcing previously released economic data and Americans’ lived experiences.
Still, the survey allowed Fed researchers to delve deeper into the finances of racial and ethnic groups — including breaking out data specific to Asian Americans for the first time — and into families’ pandemic experiences.
The 37% rise in net worth, which was more than double the next-largest upswing on record, was largely fueled by asset growth — specifically home values and stock market gains, Fed researchers said.
From 2019 to 2022, the homeownership rate increased to 66.1% from 64.9% three years earlier; however, median net housing values (home value minus home-secured debt) mushroomed by 45%. Three years earlier, at the tail end of the largest economic expansion in US history, net housing values increased 13%.
The recent boom in home values was experienced across all income levels, but it also far surpassed the financial gains made, resulting in housing affordability falling to historic lows.
The median home was worth more than 4.6 times the median family income, according to the report.
This story is developing and will be updated.
by tyler | Oct 17, 2023 | CNN, economy
When war broke out in Ukraine last year, Federal Reserve officials were quick to speak about it.
“Let me comment on what I think is on everyone’s minds today: Russia’s attack on Ukraine,” Fed Governor Chris Waller said on February 24, 2022, hours after Russia invaded Ukraine.
“Obviously, there are people in harm’s way and we shouldn’t lose sight of them. It is far too early to judge how this conflict will affect the world, or the world economy, and what the implications will be for the US economy,” Waller said.
Now, there’s another war going on, between Israel and Hamas.
Yet in Waller’s first public appearance after Hamas invaded Israel last weekend, he did not acknowledge the tragedies that have unfolded.
In his second appearance since the war broke out, he said he doesn’t think there is a strong chance it will hurt the US economy unless there’s a major spillover effect that chills business and consumer sentiment.
Fed Vice Chairs Michael Barr and Philip Jefferson, Fed Governor Michelle Bowman and Dallas Fed President Lorie Logan all made public remarks last week. None made mention of the war in Israel.
Emma Jones, a spokesperson for the Fed, declined to comment on why many Fed officials, who in the past moved swiftly to acknowledge the war in Ukraine, weren’t addressing the war in Israel.
That shouldn’t be the case, James Dorn, a Fed policy expert and a senior fellow at the libertarian-leaning Cato Institute, told CNN. “The Fed addresses climate change and diversity, you’d think they ought to address the seriousness of what’s going on in the Middle East,” he said.
There are some Fed officials who are starting to talk about it, though — albeit only when asked questions.
Atlanta Fed President Raphael Bostic was the first to speak about the war, at the American Bankers Association’s annual conference last Tuesday.
“My heart goes out to everyone who has been adversely affected by that situation,” he said, adding that, “it’s really troublesome.”
With regard to how the conflict will impact both the US and the global economy, Bostic said “this is just another new, unexpected thing that is going to cause everyone to have to rethink where our markets are going to be, where our partners are going to be.”
During a moderated discussion at Minot State University in North Dakota last week, Minneapolis Fed President Neel Kashkari didn’t address the conflict until the very end.
“The first mechanism by which geopolitical events — whether it’s Russia invading Ukraine, or the Hamas attack on Israel — affect the economy… is through commodity markets, through oil prices, first and foremost, but through other commodity markets as well,” he said.
“We saw huge price moves when Russia invaded Ukraine, so far much more muted moves around what’s happening in Israel,” he added.
Kashkari labeled the conflict a “human tragedy.”
Boston Fed President Susan Collins said that, “given the size of the US economy,” it is generally much more resilient to global shocks.
“Many of the impacts of the horrific events and what we’re seeing at the moment are beyond the economic ones,” Collins said during an event hosted at Wellesley College last Wednesday. Nevertheless, the conflict is something the Fed will take into account in its models that help officials make policy decisions, she said.
Philadelphia Fed President Patrick Harker said the US economy can still achieve a soft landing, a scenario where inflation retreats without pushing the economy into a recession.
“Now there’s a huge caveat that we’ve been hit time after time with shocks — proverbial ‘black swans’ that come out of left field that we don’t expect,” he said on Friday at an event hosted by the Delaware State Chamber of Commerce.
The war in Ukraine was one of those, he noted, and now it’s “this horrible situation we’re seeing in Israel and the Middle East more broadly.”
It’s unclear if the Israel-Hamas war will “more broadly” impact the global economy, Harker said.
While it may be true that a war between Israel and Hamas alone may not amount to much for the US economy, there’s a significant and growing risk it will escalate to a multinational war potentially involving Iran, Lebanon and Syria given the recent tensions among those nations.
JPMorgan Chase CEO Jamie Dimon isn’t treating that lightly.
“Now may be the most dangerous time the world has seen in decades,” he said on the bank’s third-quarter earnings call last week. The war, he said, “may have far-reaching impacts on energy and food markets, global trade and geopolitical relationships.”
Dorn of the Cato Institute said Fed officials “have to think about the economic implications of this.”
One threat to the economy is if more countries — including the United States — impose stricter embargoes on Iranian oil. US sanctions on Iran are supposed to prevent Iranian oil from being sold in the United States, but traders have been able to find loopholes to get around it in the past.
Even so, Iran’s influence on the global oil market is limited. According to Kpler data, the country exported only about 1.4 million barrels a day of crude in the third quarter, accounting for a maximum of 1.4% of global supply.
By comparison, Russia was the world’s second-largest oil producer in 2021, according to Rystad Energy data. That’s why there was a much more immediate spike in gas prices across the globe after a slew of countries banned Russian oil imports after the invasion of Ukraine.
That’s probably why more Fed officials were quicker to acknowledge the war in Ukraine, Dorn said. But there’s more to it than that, he said.
“This is a much more emotional thing for a lot of people,” he said, referring to the war taking place in Israel and Gaza, whereas Ukraine had a lot of bipartisan support initially. “I don’t think the Fed wants to look like they’re taking sides,” Dorn added — but said Fed officials could easily talk about it without looking partial.
There’s also a more substantial risk that a multinational war spills over into the Strait of Hormuz, a narrow waterway off Iran’s southern border through which 37% of global seaborne oil exports travel each day.
Any surge in oil prices that results from the war “would likely lead to more demand destruction than in 2022 when the economy was fiscally stimulated,” said Gregory Daco, chief economist at EY-Parthenon.
Higher gas prices, which are likely to cause consumers to cut back on spending in other areas, combined with the impact of all of the Fed’s rate hikes since March 2022, could cause the central bank to rethink further rate hikes entirely, Daco said.
by tyler | Oct 17, 2023 | CNN, economy
Spending at US retailers continued to grow last month, a fresh sign that American shoppers aren’t tapping out just yet.
Retail sales, which are adjusted for seasonality but not inflation, grew 0.7% in September from the prior month. That’s slightly below August’s revised 0.8% gain and marks the sixth-straight month of growth. Factoring in September’s 0.4% rise in consumer prices, inflation-adjusted retail sales were up 0.3% last month.
From a year earlier, retail sales and food services spending were up 3.8% in September, the strongest annual gain since February.
Spending grew across most categories last month, with sales at specialty stores advancing the most, by 3%. Online sales and car purchases also grew at a strong clip, both rising 1.1% in September from August. The two weakest sales categories last month were clothing and electronics, declining 0.8% during the same period.
“With employment high, wages outpacing inflation, and recession talk quieter, consumer spending is growing and propelling the economy forward,” wrote BIll Adams, chief economist at Comerica Bank, in analyst note. “But growth will likely be slower in the fourth quarter, with headwinds from the restart of student loan payments, the UAW (United Auto Workers) and actors’ strikes, and tail risks from the Israel-Hamas war and a possible government shutdown.”
Compared to August, higher gas prices had a much smaller effect on retail spending in September. Excluding sales at gasoline stations, retail sales still advanced 0.7% last month. Adams said the US Energy Information Administration “reported a jump in gasoline inventories in the last several weeks, consistent with a seasonally adjusted drop in volumes sold.”
Still, a respite from higher energy prices remains at risk if an escalation of the conflict between Israel and Hamas destabilizes the oil-rich Middle East, further tightening oil supply. That would inflict more pain at the pump, pushing up inflation and eroding Americans’ spending power.
The US economy is widely expected to lose some momentum in the coming months, including a weaker job market and softer consumer spending, which accounts for about two-thirds of economic output.
The Fed’s 11 rate hikes, higher bond yields, tougher lending standards and the fatigue from high inflation are all expected to pull on the economy’s reins heading toward the final months of the year. There is also the uncertainty around ongoing labor strikes, which some Americans have already begun to raise concerns about in the University of Michigan’s bimonthly consumer survey. And the excess savings that US consumers accumulated during the pandemic might have already been depleted by now, according to research from the San Francisco Fed.
Altogether, the economic landscape is expected to become more challenging, but American consumers have proven to be resilient this year in the face of inflation and higher borrowing costs. The fate of spending largely hinges on the state of the labor market.
“Retail sales continue to surprise on the upside because of lingering competence in the labor market, even though savings are down and real incomes obviously continue to get squeezed by inflation,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told CNN.
Employers added a stunning 336,000 jobs in September, beating economists expectations yet again, while the unemployment rate held steady at a low 3.8%. A separate report released earlier this month showed that job openings unexpectedly rose in August to 9.6 million, though they were considerably lower than the record high of 12 million set in the spring of 2022.
Economists say that the economy’s performance during the holiday season will be key in understanding it’s trajectory in the early months of 2024.
Brian Field, global leader of retail consulting and analytics at Sensormatic Solutions, a retail data analytics company, said in a statement that he’s expecting foot traffic at US retailers during this year’s holiday season to “remain consistent” compared with last year’s traffic, barring extreme weather.
While bets of a recession this year have collapsed, an economic downturn sometime next year is another question.
An intensification of the Israel-Hamas war in the Middle East could cause energy prices to rise, complicating the Federal Reserve’s mission of bringing inflation back down to its 2% goal. It would push up inflation overall, and if energy prices remain elevated for long enough, it could also feed into so-called “core” inflation, or a measure that strips out volatile food and energy prices. Services such as flights and freight could become more expensive since those include the use of fuel.
US consumers are highly sensitive to changes in gas prices, so if energy prices spike because of war in the Middle East, consumer sentiment could also take a hit. Eventually, Americans could curb their spending as higher gas prices take a bigger bite out of their budgets.
Evidence of Iran’s direct involvement in Hamas’ brutal attack on October 7 would strengthen US sanctions on Iran, weighing on oil output and exports, EY-Parthenon Chief Economist Gregory Daco told CNN in a recent statement. On top of OPEC+ production cuts, tighter oil supply because of war in the Middle East would inflict more pain at the pump.
“A surge in oil prices in the current economic environment would likely lead to more demand destruction than in 2022 when the economy was fiscally stimulated,” Daco said. “This, combined with the drag from financial conditions could put significant downward pressure on domestic spending and investment so that the Fed would not necessarily want to tighten monetary policy more.”
The Israel-Hamas war seems to still be raging on with reports of multiple airstrikes in the region on Tuesday.
President Joe Biden will visit Israel and Jordan Wednesday.
