Aug 98 min read

Has the U.S. Economy Reached a Tipping Point?

News story originally published in The Wall Street Journal. To see the full story, please click here: https://apple.news/A5pUfeu1qSZWXGQPghi4eKA

As America teeters between a soft landing and recession, uncertainty is weighing on anxious consumers and businesses.

By Jon Kamp, Rachel Wolfe, Ruth Simon and Justin Baer - The Wall Street Journal

August 9, 2024, 5:30 am EDT

Six months ago, Alex and Aaron Taylor booked a six-day trip from Minnesota to Walt Disney World for their family of five over the Thanksgiving holiday. In late June, Aaron lost his truck-driving job, and he is still struggling to find a new one.

They decided this week to cut the Disney visit to a single day. They will be spending more time at the hotel pool instead (but haven’t yet told their children about the change in plans).

“The labor market was flooded during Covid, and now things are just not lining up,” said Aaron, 41. “Everything it seems like is at a standstill right now.”

Such challenges are reverberating through an unsteady economy, giving rise to a central question: In the long fight to cut inflation and dodge recession, have we reached a tipping point?

Until recently, the U.S. appeared to be headed for a soft landing—with inflation coming down while employment has remained high and growth has been steady. Events of the past few weeks, however, have undermined confidence in that outlook, with some economists raising the probability of recession and others saying the Federal Reserve needs to cut interest rates more swiftly to stave one off. The uncertainty is weighing on consumers and businesses of all sizes as they try to make spending decisions and plans.

Disney said this week that income from its theme parks dropped, in part because of softening demand. The company pointed to “economic uncertainty that is impacting consumers” and said it expected weaker consumer demand at its theme parks to persist.

Several other companies, including Airbnb, McDonald’s and Trex, a composite-decking company, have flagged softening consumer demand.

The bad news from U.S. companies comes as economists assess whether the recent hiring slowdown and rise in unemployment that temporarily rocked equity markets could be a step toward a recession, or mark a brief scare. Adding to the mixed signals, mortgage rates fell to the lowest level in more than a year, and filings for unemployment benefits declined, easing some worries about the labor market and triggering a Thursday stock rally.

Economists widely expect the Fed to start cuts at its next meeting in September. In the interim, businesses and everyday consumers will make myriad decisions—whether to book trips, upgrade kitchens, approve business travel or hire more workers—that could help push the country one way or another.

“We should be at an inflection point,” said Vineer Bhansali, founder of LongTail Alpha, a hedge fund in Newport Beach, Calif. It is difficult to see what is coming around the corner, he said, adding, “It all happens slowly, and then it happens suddenly.”

For many Americans, worries about a slowdown and anxiety about their jobs might outweigh the benefits of lower interest payments, he said.

Consumer spending makes up about two-thirds of the U.S. economy. When consumers pull back, there can be major effects on businesses, which might move to cut costs, often by laying off workers.

The University of Michigan’s Surveys of Consumers have shown that consumer sentiment, though far above a historic low in mid-2022, remains guarded as high prices drag down attitudes, especially for lower-income people, Joanne Hsu, the surveys’ director, said after the July report.

Nancy Lazar, chief global economist at Piper Sandler, an investment bank and financial services firm, said the confidence of middle-income consumers is “in recession territory. We’re even starting to see the high-end consumer struggle.”

The question now, she said, is, “What could companies do to continue to support the consumer?” The answer, she said, “To allow their profit margins to go down” to avoid layoffs. As unlikely as that sounds, Lazar added, “There is a view that given the difficulty of hiring people, companies will be slow to lay off.”

Signs of shaky consumers have ricocheted through recent corporate earnings reports. Trex warned investors Wednesday that it was seeing weaker demand for midlevel products. Monster Beverage blamed weak sales of its energy drinks on the pressures being felt by its blue-collar customers. Shares of both companies dropped sharply after their latest results.

“There’s just a little more uncertainty about where the economy really is,” Joseph Hinrichs, chief executive at the railroad CSX, said on an earnings call Monday as the stock market nosedived.

He said that CSX, which moves freight along the U.S. East Coast, had seen a slowdown in shipments from auto factories in recent weeks and that he was closely watching for any interest-rate cuts that might help the autos and housing markets.

“You could say where we are today versus two months ago, the economy seems to be a little bit more fragile,” Hinrichs said. “And we’re optimistic that it can pick itself up, but we’re watching it very carefully.”

Nick Vaughn, managing partner of Kitchen & Bath Galleries in Chapel Hill, N.C., said the company will be cautious about extending credit to new customers, and doesn’t expect to step up capital expenditures or add to its staff of 18, unless it finds an exceptional candidate.

At the same time, Vaughn said the pipeline for design work there has never been stronger.

“This team will keep the foot on the gas pretty heavy,” he said. “My energy level is pretty high at the moment. I see opportunities.”

In Wisconsin, employees of Huth-Ben Pearson International, which makes pipe and tube fabrication machinery, are working four days a week this month at reduced pay. Kenneth Murray, the company president, has promised a return to a five-day schedule in September. Head count is at 23, down from a high of 27, and Murray doesn’t want it to go any lower.

“People don’t want to commit dollars to drive things forward until they know which way the wind is blowing,” Murray said. Inquiries about potential machinery orders from new and existing customers are relatively strong, but orders are at a low point, marking the company’s second rough year in a row. As part of a silver lining, workers have had extra time to clean equipment.

On Wednesday morning, roughly a dozen loan officers filed into the headquarters of Fountain Trust Co., a century-old community bank based in tiny Covington, Ind. They were meeting with Fountain’s top executives to compare notes on the customers they serve.

They are seeing signs of both economic resilience and creeping uncertainty.

“People are still doing things,” said Lucas White, Fountain’s president. “We hear complaints regularly about how much the basics cost. But consumers are still buying things, and businesses are still doing what they do and are expanding.”

Lately, though, some customers have been stopping by their local branches more often to ask their bankers for their takes on the health of the economy.

“On edge,” said White, who is also chairman of the Independent Community Bankers of America, an industry group, describing customer sentiment. “Anxious might be too strong. They are aware of it, but most are not done spending.”

Wars in Europe and the Middle East, a tense presidential election and recent market turbulence prompted Bill Quackenbush, 70, to inquire about taking on some consulting work for the private equity appraisal company that he retired from last year.

He and his wife, Robin, have delayed a planned trip for their coming 50th wedding anniversary, and they are forgoing a new-car purchase, instead sticking with their 2016 Toyota RAV4. They want to weather what they expect is coming economic uncertainty, the Newburgh, N.Y., couple said.

“With the craziness in the market, rather than make a year’s worth of withdrawals, I can work part time and not have to touch my retirement,” Bill said.

Aaron Arizmendi, who teaches Spanish at a private high school in Phoenix, dropped plans last year to replace his 2009 Lexus. He has also been careful about his spending in recent years, leery of high prices that eat into his savings, and has cut back on dining out and delayed some home improvements.

The latest economic uncertainty has reinforced this wariness. “I’m a lot more cautious about where I put my money,” said Arizmendi, 41.

Juan HernandezAriano, a certified financial planner and principal at WealthCreate in Houston, said several of his clients have floated the idea of working a bit longer, rather than retiring in the next five years as planned.

More broadly, he said he isn’t hearing the level of worry that erupted during the 2007-09 recession, the pandemic, or the 2023 collapse of Silicon Valley Bank, as he talks to clients. “It’s not panic, it’s curiosity,” he said.

The real-estate industry is counting on lower mortgage rates to attract would-be buyers who were dissuaded by high rates and record high prices.

“People are concerned about the economy weakening, but I think they are mostly excited that the affordability is going to be better for buying real estate, which is what they’ve been waiting for for many months,” said Corey Burr, a real-estate agent in Washington, D.C.

Lower rates would also help a banged-up commercial property industry that depends heavily on borrowing money.

For others, employment and income are the principal concerns.

Mindy DeHate, after losing her chief operating officer job in Minneapolis in June and digesting recent labor and stock-market news, canceled a trip to both New York and Italy. A divorce last year ate into her nest egg, and she is hoping to land a new job before she has to tap her 401(k).

“I’m extremely hesitant to make even the smallest purchases now,” DeHate, 54, said.

Job instability has rocked the Taylor family, in Dassel, Minn., a small city to the west of Minneapolis. After losing his job, Aaron Taylor said he has been through hundreds of job applications with no luck.

Alex Taylor, 32, said she feels as though she has less opportunity for growth in her job in operations for a healthcare company than she did a few months ago. Up until recently, the Taylors felt as though they were in the best financial position in their lives, with a four-bedroom home they bought in 2021 at a low interest rate and Disney plans in the making.

More recently, the couple decided to start buying holiday gifts on payment plans, so they can make four payments spread a month apart leading up to Christmas.

“I don’t know what four months from now is going to look like,” Alex said. “So I can’t wait four months to plan this.”