Our conversation with Alex Chausovsky is now available on-demand. Watch now.
Ian Heller and Jonathan Bein spoke with Chausovsky recently about his thoughts on the economy and what he expects for late 2024 and beyond.
Ian Heller: Inflation is down about 2.5% right now. Job growth has slowed, but it’s still positive. The Fed recently cut interest rates. Did the Fed pull off the elusive soft landing?
Alex Chausovsky: The data says they have pulled off the soft landing, at least through the third quarter of 2024. Most people in this country who want a job have one. The unemployment rate is slightly higher than it was by about half a percent, but that’s largely a function of people joining the labor market. The numerator is getting larger than the denominator. It’s not a function of massive layoffs, which is what we typically see when we see a significant increase in the unemployment rate. Inflation, as you mentioned, has come down. There are still pockets of stickiness. Rent and housing inflation is higher than it should be.
In some service sectors, inflation is higher. By and large, inflation is in the strike zone of that 2% target. Honestly, it’s done better than most people expected relative to the 8% to 9% year-over-year inflation we had not long ago.
We just got a report yesterday that consumers are willing and able to spend money in the retail environment. Consumer expectations drive 70% of the U.S. economy. That all comes together to say, so far so good. They’ve nailed that soft landing that everybody was doubtful about.
Jonathan Bein: You can tell people that the rate is down, but what they’re feeling is the aggregate effect, the compounded effect of a couple years of inflation. Is that a fair statement?
Chausovsky: It’s such an astute point, Jonathan. I’m quite active on LinkedIn posting commentary and analysis all the time. Every time I make a post about the deceleration in inflation, people respond that prices are so much higher than they were three years ago. The price of eggs, the price of going out to eat, the price of rent, and they’re absolutely right. Inflation over the last three to four years means that we are paying between 25%-30% more for the things that we buy today on average than we did pre-pandemic. It’s a function of human psychology. We are holding on to the way it used to be. Well, I remember I paid this much for a dozen eggs. Now I go to the grocery store and my bill is 30%-40% higher, if not more depending on where you live.
Prices across the board are elevated, but the reality is prices very rarely going to go down, and we’re not anticipating that. I think it is really important for people to normalize what the pricing environment is now, rather than yearning for the days of old where they were paying less. They need to figure out how to operate in an environment that has higher prices across the board. This is true for individuals and their personal finances, and this is also very true for businesses and organizations across the landscape, particularly for distributors.
Bein: Relative to other countries, how has the U.S. done in terms of inflation over that longer time period from COVID and then recently, how do we stand relative to other countries?
Chausovsky: It differs depending on the region you’re talking about. If you look at our trajectory relative to Europe, I would say that we’ve done better. We didn’t have inflation go as high as they did, and we were quicker to see it come back down. If you look at inflation in many of the leading industrial economies in Europe, whether that’s France or Germany, the U.K. or Spain, it’s still elevated relative to U.S. levels of inflation. If you look at other parts of the world, Asia, for example, in China they’re facing the risk of deflation right now. The demand is so weak over there that producers and businesses of all types are cutting prices in order to stimulate some economic activity. Then, you look at places like Japan, which has been flat. Largely speaking, the U.S. has outperformed in its battle with inflation relative to many other parts around the globe.
Heller: What’s the performance of wages versus inflation? It’s about buying power and absolute prices, ultimately.
Chausovsky: It’s an example of human psychology at work. Many times, when I’m talking to clients, I feel like more of a therapist than an economist. It has to do with how they are feeling. Do you feel like you’re keeping up? For several years, we did not feel we were keeping up when inflation started to rear its ugly head. In 2022 and 2023, the pace of inflation definitely outpaced that of wage growth.
Once we got into the middle and latter part of 2023, that dynamic flipped, and wage growth caught up to and then exceeded inflation. If you take the cumulative effect, people are feeling like they’re behind the curve. That’s contributing to that feeling of frustration and anger, both with a political establishment and their own lot in life, whether it’s their job or their individual circumstances or living environment.
If you look at overall, we’re a few percentage points behind in terms of what our wages have done over the last three to four years relative to what the cumulative effect of inflation has been over that period of time. Wage growth as of the last year, year-over-year growth is at 3.8% on average in the United States where we stand today. Inflation is currently around that two and a half percent mark, depending on which metric you’re looking. As of right now, wage growth is still exceeding inflation, but those are averages. Your own individual experience may vary.
Heller: What are you projecting for the rest of 2024, and do you have a view into 2025?
Chausovsky: Let me break down the answer in a couple of buckets because talking about the overall economy oftentimes masks the nuances of what’s going on at the level of different sectors. I touched on the consumer side. I’m a big believer that as long as people have jobs, they will continue to find ways to go out there and spend money. Two-thirds of economic activity is driven by personal consumption, I think that we are in a good place right now.
One measure I track is one that assesses retail sales. Historically, when retail sales are growing by between 2%-3%, which is where we are right now, the economy chugs along. What has kept us afloat and allowed us essentially to achieve this Goldilocks scenario of a soft landing is the consumer.
I’m not seeing layoffs increasing in any significant amount. We should be able to continue that type of behavior into the latter part of this year and into 2025. Most of the money that we’re spending is on needs. We are being preferential and shifting some of our preferences. The focus on goods that we had in 2022 and 2021 when we were cooped up in our houses has faded. We’re now more geared towards experiences that include vacations, eating out and spending time with our family and friends. The services part of the economy is definitely getting a lift at the expense of the goods.
I was talking to a furniture store client of mine. I asked them directly, what is foot traffic doing right now for you guys? And they said down, but it’s not just us. The industry across the board is down about 15%-17% in terms of foot traffic. That’s because many people bought furniture during the pandemic and now there’s this kind of vacuum that’s left over. They wanted to know when that will improve.
My thoughts are that it has to do with housing. The housing element of the economy is so important. Single-family housing is a leading indicator to the U.S. economy. That’s been struggling because of that high-interest rate environment. Now, interest rates are going to come down and should alleviate some of that downside pressure on housing and at least partially turn on some of the spigots that have been running dry.
On the industrial and distribution side, it’s been quite different. We’ve had essentially flat to slightly negative performance across the board. It does differ by the specific vertical market that you’re talking about.
You look at industrial production, the broadest measure is the B2B side of the economy, and it’s currently down 0.2% year over year. I pay attention to a lot of different leading indicators that give me a sense of what’s to come in the next six, nine and 12 months. They’re pointing to some rise in the economy. That makes sense logically when you think about the industrial sector that has been hurt by the high-interest rate environment and the high cost of capital. Companies are trying not to borrow at 9%-12%. They’re making do with what they’ve got.
Orders for capital goods like equipment machinery are down in some cases quite substantially, depending on the segment of the economy. But they’re looking to start rising again in terms of a cyclical performance. That means that the downside pressure should ease and we should start to see some acceleration into late 2024 through the first and second quarter of 2025.
The longest leading indicator I have is the purchasing managers index (PMI). That is a survey where they ask the people responsible for future buying about their outlook on future behavior. Keep in mind this has a full year of future visibility into the economic landscape. We’re now talking about mid to third quarter 2025; it started to turn down again.
That could be corroborating evidence that the Fed waited too long to start these interest rate cuts. If we get meaningful signs that they’re going to get away from the restrictive policy that they’ve had for the last year and a half to one that’s more neutral or even slightly accommodative, that can turn around very quickly. Right now, I’m seeing near term in the next three to six months, slight acceleration and improvement in the industrial space. And then beyond that, I think it’s going to largely depend on how quickly we get away from the restrictive interest rate policy and the high cost of money to one that’s more normative.
Heller: How would you address the deflation of specific commodities?
Chausovsky: This is a really difficult thing for distributors to navigate. In the grand scheme of things, things tend to work out favorably to offset the weakness on the downside. In the moment when you’re dealing with having paid a higher price and having to sell it lower, that’s a very difficult thing to do. The more communication you can have the better in terms of projecting market demand, and from the supplier’s perspective on getting more stable prices, longer-term contracts, trying not to buy inventory on demand. Thinking not only about what you need in the moment, but also planning for the future can offset some of the pain.
In industries like lumber or in commodities like steel, copper and aluminum, there are other elements at play. When you’re talking about importing from China, the strategic imperative of the Chinese government has clearly shifted. They have changed their approach of trying to rebalance the economy and lean more toward domestic consumption. They have gone all in these last six months on being the cheap manufacturing house of the world. Now, they have the idea that they’re going to produce so much output that they’ll flood the international markets with low Chinese product. Then, you’re not only dealing with an inventory holding issue, but also with competition from much lower cost alternatives coming from China.
To offset and temper this, it’s critical to diversify sourcing. This is what’s called the China plus one strategy. It means you’ve got suppliers in China, and you’ve also got some Southeast Asia opportunity, Vietnam, Malaysia, Indonesia, Philippines, Eastern Europe, Czech Republic, Poland and the Baltic states. Also look south of the border to Central South America or places like Mexico and Brazil.
