Working as Designed

Fed policy is doing what it's supposed to be.

Summary: While inflation is sticky and consumer spending is still resilient, there are signs that growth is slowing and inflation has been stabilizing. Fed policy is basically doing what it's supposed to be.

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Macro

Inflation is in the system

"On the economy and on inflation, I would say, inflation is clearly moderating. The disinflation is clear, but it's still sticky. We were just talking, I was at an event yesterday with a handful of CEOs, and most of whom are here speaking today, and we all kind of agreed, it's still there, it's in the system. Companies are used to getting price. They plan to get more price. The customer, whether it's a consumer or an institutional business, B2B customer, is used to absorbing the price, and so it's in the system. Wages are still sticky. There's some commodity price inflation. So supply chains are still not fully normalized. So it's just stickier and I think the Fed obviously sees that." - Goldman Sachs (GS 0.00%↑) President John Waldron

“Three months ago, there were several indicators showing some favorability, including decreasing inflation, continued low unemployment, encouraging trends in consumer confidence, and the beginnings of a housing market rebound. Since then, inflation is still high, mortgage rates are high and consumer confidence scores are trending lower” - Best Buy (BBY 0.00%↑) CEO Corie Barry

Consumer confidence has been impacted

"Consumer confidence has been impacted. Our belief is that it's inflation-based, it's menu price that restaurants based. You can see it across the portfolio of customers that we serve from QSR to higher end, QSR has been hit the hardest. I think that's pretty clear on the why is the lower income customer is struggling more than the higher income customer. But there's some softening, we believe, tied to menu prices." - Sysco (SYY 0.00%↑) CEO Kevin Hourican

"they're getting a little more tentative and that is due to everything going on around them. Goods are more expensive, they are shaping their spending. They're going to three grocery stores instead of two, is one of the stats we see. Interesting part as it relates to inflation is the rental payments by our che -- checks out from rental payments. They're now tipping over and the growth rate is slowing, which if you listen to the inflation experts, they'll say they had to see that tip over to feel inflation was really on the downward path." - Bank of America (BAC 0.00%↑) CEO Brian Moynihan

"Consumers are stretched financially right now. You see the rise in credit card debts and so forth." - General Mills (GIS 0.00%↑) CEO Jeffrey Harmening

"We believe that we are seeing--we’re benefiting from more trade-down traffic in our stores, and that’s helping to support our comp trend. In 2022, it felt as if moderate to high-income shoppers were somewhat insulated from the impacts of inflation, perhaps they had excess savings that they could tap into. But we believe that now, that demographic is also feeling the pinch - we think that’s good for us." - Burlington Stores (BURL 0.00%↑) CEO Michael O'Sullivan

"We know that customers are definitely feeling pressure. You have heard that across the retail space particularly for us, it continues to be that middle-income customer that's been the most impacted." - Kohl's (KSS 0.00%↑) CFO Jill Timm

Half of consumers believe we're in a recession 

"half of consumers believe that we're in a recession. So that makes a difference in terms of how do you think about what you want to spend money on and what are you going to -- how are you able to feed the family." - Kraft Heinz (KHC 0.00%↑) U.S. Zone President Carlos Abrams-Rivera

But consumer spending has been resilient 

"The consumers still continue to be healthy. They're spending in a healthy manner…we're still seeing fairly stable trends consumer spending standpoint. So all in all, we are continuing to see the consumer be healthy." - Mastercard (MA 0.00%↑) CFO Sachin Mehra

"If you look at the first three weeks of May through May 21, we've seen continued stability. US payment volume, payment transactions, and cross-border have all been similar to what we've seen in the second quarter and before that. So stable growth around the world." - Visa (V 0.00%↑) President Ryan McInerney

"The consumer is very resilient, maybe a little bit of weakness at the lower end, but broadly quite resilient, and the fiscal spend, particularly in the United States, but I'd say globally, but particularly in the United States, is a big tailwind. So in terms of GDP growth, you get a lot of fiscal impulse." - Goldman Sachs (GS 0.00%↑) President John Waldron

"Even with higher interest rates, inflationary pressures and overall concern about the economy, the consumer continues to be resilient and selective." - Nordstrom (JWN 0.00%↑) CFO Catherine Smith

Growth is slower than it had been though

"Number one, if you look at, what we talk about a lot is the spending the money moving through the consumers accounts, which is $4 trillion-plus a year, which is money moving out in the economy. Cash out of the ATMs, cheques return, settle payments, debit credit cards. And if you look year-to-date, that's growing about 3.5%. So that number doesn't mean a lot unless it has a context. If you looked at it May of '23 versus May of '22, it had probably been like high single-digits, maybe even double-digits" - Bank of America (BAC 0.00%↑) CEO Brian Moynihan

“And so, I think the Fed is having success, as we said earlier, in getting inflation to come down. But the impact of that is I do think growth will slow. And I do think it will give the Fed an opportunity this year to cut, say, one time. I think that they are having success here. So, I know there's a debate,"Is the economy reaccelerating? Is inflation taking off?" That wouldn't be our view. I think our view would be inflation probably a little lower than consensus and then growth a little lower than consensus. But we're not talking about things falling off a cliff, just a deceleration we're seeing in the economy." - Blackstone (BX 0.00%↑) COO Jonathan Gray

“so when we look at the portfolio companies today, there's nothing flashing there that says imminent recession. There's nothing flashing there that says inflation is going to cool immediately to 2%. EBITDA growth is high single digits." - Carlyle Group (CG 0.00%↑) CEO Harvey Schwartz

And Costco sees inflation as leveling off

"As inflation has leveled off, our members are returning to purchasing more discretionary items and growth in the category was led by toys, tires, lawn & garden and health and beauty aids…On the inflation front, it's more of the same from last quarter. Across all core merchandise, inflation was essentially flat in Q3. And with Fresh foods close to 0 and slight inflation in food and sundries being offset by some deflation in nonfoods. The deflation in nonfoods was led by hardware, sporting goods and furniture all still benefiting from lower freight costs year-over-year." - Costco (COST 0.00%↑) CFO Gary Millerchip

Fed policy is basically working

"Fed policy is basically working, I think as designed. I think the lags are longer. I think because we had such a unique experience in the pandemic and all the stimulus, which was extraordinary, we're seeing longer lags than would be the traditional kind of lags you would see in monetary policy. But their policy, I think is basically working. It's putting some brakes. There are signs of a slowdown. It's not dramatic, but you can see the economy getting a little bit softer. And I think if you're the Fed, you really have to slay the inflation dragon. The worst thing they can do is take their foot off that brake too fast and inflation doesn't really get subdued and you end up having it come back and then they're a little bit chasing it, which was what happened in the 70s. This won't be anywhere near as pronounced in the 70s, but they have to make sure that doesn't happen." - Goldman Sachs (GS 0.00%↑) President John Waldron

International