The Supply Chain And Consumer Spending

Let's get some color under the hood there. We can do that with Ottoman OZL. Drum, Senior director of Economic Research at the Conference Board. He got his pH d in economics and Happy Valley at Penn State. So we welcome Ottoman. Thanks so much for joining us here. What did you see in your numbers this morning? Again a little bit better than expected? Good morning. Yes, Uh, the heavy I rose pretty sharply this morning. Overall, the trend in the leading indicators is still pointing to a gathering

momentum in the economies. So uh, the expansion is to continue into the first half of two. But talk to us about inflation. I mean we're hearing from Senator Joe Manchin, Inflation is the biggest threat. Do you see that as a threat to hurt the consumer in any pullback in consumer spending? Yeah, Inflation does pose one of those risks in the outlook UM, and it directly affects consumers purchasing power.

So pull back in spending UM and consumers sort of outlook on the economy has been worsening throughout the fall, largely because of what's what's happening in their wallets. So that does pose their risk. And the Fed of course has been responding to that UM and UH trying to cool down the economy and uh that will possibly bring the economy back to a more sustainable but healthy growth rate u UM, and we'll begin to see that in

the leading indicators. So Ottoman, I guess you know one of the issues here is just the consumer here, and we've got this oncron variant here. How do you think that's gonna impact, if at all, kind of the the economy in two Yeah, that's the other large risk that's looming in the outlook. Uh. So COVID nineteen we were already expecting winter wave. I think the omicron complicates the matter a little bit more in terms of how much it's going to impact. It does feel like deja vu.

You know, we've've been through these ways before. But I think the difference now is that you know, we have the vaccines uh and uh more reliable treatments. So UM, you know, if the public health aspect can be contained um and managed, perhaps UM you know, it doesn't pose a huge economic risk for the economic outlook. UM. So to the extent that UM, you know, we don't go into these significant, large scale lockdowns. You know, perhaps we

can weather this winter wave of COVID nineteen. What are you hearing about, you know, not only really expectations for the next year, but three five years out, particularly in the face of what could be a potential rate hike or three or four in the next year. How is that affecting some of the economics and consumer sentiment? UM well longer longer horizon. UM. You know, we are seeing kind of uh, you know, healthy robust economic growth rates,

especially in the US. UM. The fundamental uh sort of supply demand relationship is you know, working in the US economy, whether you look at consumer spending or labor markets. UM. You know, if we can whether these risk in the next three to five years, you know, perhaps inflation doesn't become a persistent feature of the economy, and it can be Uh, those risks can be can be handled so automan.

It seems like most shoppers are finding generally what they want here for this holiday shopping season, and that's kind of what the supply chain concerns. Maybe a little bit on the back burner, but I'm looking at map go on the Bloomberg term, and I still see lots of ships stocked off the ports of Los Angeles and Savannah. How big of an issue is that for you as

you think about your outlook. Yeah, the supply chain disruptions UM, you know, have have been pushing up prices and we do expect um those uh to resolve in the longer term. But I think in the near term next year, we will continue to see some of those bottlenecks UM and the volatility and destructions in races uh partly a matter of this, you know, mismatch between the supply and demand and the inability to deliver on time. UM. But eventually, you know, they will be resolved in the long return.

But I think in some sectors we are going to continue to see those and I'm thinking specifically of you know, motor vehicles and semiconductors used in the automobiles and so on, that might take longer to resolve because you know, you need more investment in those areas. All right, Ottoman, thank you so much for joining us here. Ottoman also Drum,

Senior director of Economic Research for the Conference Board. Conference Word report of their leading Economic Index for the month of November came in at one point one percent positive versus the consensus of one percent. So again, still some positive news out there in the economy. Led by the consumer supply chain. It's been an issue really since yeah, the majority of this pandemic and the economic disruption and then the reopening really exposed from the shortcomings in this

global just in time economy. Let's get the latest on our supply chain issues. We can do that with Dr Lisa Williams, chief executive Officer of World of EPI. Lisa, thanks so much for joining us here. It seems like this supply chain challenge a it's a global issue, but it seems to be lingering here maybe a little bit longer than some people thought. Give us your view of kind of where we are on this challenge. A good morning, Paul, it's a pleasure to be here. You are fought on.

You're right. The global crisis is laying going on more than we'd like, and it's because of so many different issues, one of which is of course, the variance with COVID. You know, until we get COVID under control, we're going to continue to see a slowdown of supply and because of COVID previously there is an increase in pent up demand and in some cases income, So we have a shortage of product uh, slowed down supply chain, pent up demand. That right there shows the core issue related to the

supply chain crisis. We have a port question to ask you. I've been fascinated by this. We've been out several times to the port of Long Beach in the part of l A and interviewed those executive directors, and they continue to say that things are getting better. But what we're also hearing is that they're just holding out ships outside the area where we're counting. So ships look like they're going down, but we're just doing a better job of changing the optics. What are you hearing about if things

actually are getting better or not. Taylor, that's a brilliant observation. You are right, it's looking better, but there's still some of the same core issues. There is a reduction or a lack of personnel to help um drivers, truck drivers. There is a shortage of trast these equipment. So it's kind of a whackable problem with the port. Right It's like there's a delay coming in of the ships from Asia.

Then once they get here, it's find the personnel and the equipment to move it from the port into the warehouse. So there's a multifaceted challenge that we're still trying to handle. So you're right, there is a light short term improvement, light short term improvement, I want to stress that, but it is certainly nothing that is going to come to an end or bring this crisis to a quick and speedien So to that question, Lisa, what in your view is probably a reasonable time frame to get back to

some level of normalcy in terms of supply chain. Well, Paul, you know, we know this is unprecedented and because of that, we can't really look to history to give as much guidance. Unfortunately, it's going to depend upon getting a handle on COVID. It's going to depend upon getting supplies to the ingredients that we need. It's going to depend on finding the right containers, not just containers in terms of cargo containers, but containers for the bottle of the products that we

need every day. All of those different challenges of why we're seeing what we're seeing. So the question is when do we think we'll see an into all of those different facets. I don't know, but what I do believe strongly is that we will see a change around three generally, assuming we can get COVID under control. But in the beverage industry, I see it actually being longer. More like, wow,

that's that's five years away. So talk to us then about giving the longevity of the timelines you just laid out, Has anything changed permanently structurally within supply chain issues or can we bounce back? You know, what is the new normal? Look like sailors again? The new normal is going to be something usual for us. Um it is we are going to back back miles back because we are resilient people and we have that desire. So I do believe

we will bounce that. The timing of that, however, it could be a lot longer than any of us prefer and it's gonna be again until we can get COVID under control. That's like, for example, being a toy manufacturer, we ship the majority of our products from Asia. Asia. The largest port is the m t N. They have a zero tolerance for COVID, so if one person comes down with COVID, they shut things down. You can see

right there at the rippling effect that that's having. Then once to finally do get the container on a ship, it gets here, and as we just talked about, there's a shortage of containers, there's a shortage of chassis, there's a shortage of workers, there's a shortage of warehouse space. All of that continues to the length of our supply chain and adding to the supply chain crisis. So, like I said, it's a multi faculted problem that we have to address, but I do believe the core of it

is dealing with the COVID pandemic. Dr Lisa Williams, thank you so much for joining us. Really appreciate getting your thoughts and insights, which into a lingering, lingering economic challenge for the global economy in terms of supply chain bottlenecks again around the globe. Dr Lisa Williams, Chief executive Officer of World of ep I. Alright, let's switch gears and take a look at retail. We're just in the thick rate at the very end of this holiday shopping season.

Lots of money being spent there. The consumer has a lot of cash putting that money to work. Let's check in with Andrew Rostami ahead of Citizens Pay at Citizens Bank. Andrew, thanks so much for joining us here. There's a concept that's I've been hearing about for the last six and maybe twelve months that's a little bit new. By now pay later. What does that mean to you and what does that mean to the retail space? Yeah, no, thanks

and thanks for having me on the show here. Yeah, I mean by now pay later is really about, um, you know, helping a consumers spread out their payments, right, and so you know, it's about taking a large purchase and shopping that up into smaller payments, um, fixed monthly payments, similar to what you would do maybe with the car purchase. And sometimes that has no interest at all, Right, and so it can be a very responsible thing for a

consumer and why they're rarely gravitating towards that type of product. Okay, on the flip side, of that. That was interesting. Last week you're the Consumer Financial Protection Bureau just asked for an inquiry into some of these buy now, pay later companies of just asking to make sure that consumers really know what it is, Do they know their debt burden? What are some of the regulatory headwinds that you see though from this? Yeah, now, we we really think that's

a great thing that the CFPP is doing. Um, you really want to make sure you're doing it responsibly, right and so um a Citizens Pay. We're a fintech, but we're within a regulated bank, which has been fantastic. Right, So you're doing things like under writing the consumer, making sure that they have the right not just credit profile, but they have the right income to be able to afford the purchase. You're working with the credit bureau such that that dad is reported back to the bureau such

that all lenders can take a look at that. So those are the types of things you really want to make sure you're doing to put the consumer right on the right footing. So, Andrew, you know, when you talk to your retail clients, how are they thinking about supply chain issues? Because we talked to someone in a supply chain just earlier today and suggesting that this is going to stretch well into next year and maybe even longer. Is that what you're hearing from your customers? Yeah, it's

it absolutely has been a challenge. Obviously, some UM clients have different UM ownership over the supply chain UM right, based on their scale, but in general, it's it's definitely been a challenge and UM, you know, I think the real UM, the only real UM you know, panacea really is just kind of finding new ways to delight the

insumer and provide growth. Right, So, in addition to providing transparency on what shipping times may be, UM finding new ways really to provide other types of UM you know, purchases for those consumers UM you know, as it as it looks like it will you know, unfortunately continue. I'm also really curious about what you're seeing anecdotally from the consumer. Are basket size going up because prices are higher and we're experiencing inflation? Or are we actually buying more items

even if the prices aren't going up? Right? What what is that telling you? Yeah, we've we've seen UM, without going to too much detail, I mean, to spend this year is certainly higher than last year and certainly higher than pre pandemic. And when you look at that across categories, it really is broad based, save one or two categories, essentially all categories are up. We are seeing both frequency as well as a higher ticket size in the basket.

And you know that is going back to buy now, pay later, a point of sale financing that is what can really support that, right, um, where you can really make that purchase more responsibly. So we are seeing both of those tramps, but on an inflation adjusted basis, our basket size is still higher as the consumer actually stronger. Yeah, I mean again from what we can see it does

you know, appear you know, to be that way. Um. And then you know, to your point, the consumer strength still looks pretty solid, um, right, the balance parking that's happening that we see in deposit accounts, um, it's still you know, you know, relatively strong, right, so it would indicate some pretty good underlying strength in the consumer. Still all right, Andrew, thank you so much for joining us. Always appreciate getting your thoughts. Andrew Rostami, head of Citizens Pay.

It's part of Citizens Bank giving us the lay of the land on all things retails. So we've got central bankers are round the globe either raising rates as we speak or talking about raising rates in the near future. Uh. Yet I look at a tenure at one point three seven with the one global central bank who's taking the opposite of that inflation right exactly exactly. The question is what do you do in that kind of environment on the fixed income side of the ledger? Let's bringing in

a professional does this for a living r? J. Gallo, Senior portfolio manager for Federated Hermes J thanks so much for joining us here. How are you guys thinking about, and again an environment where presumably central packers around the world are gonna be pushing up rates? Well, good morning, thanks for having me. We continue to believe that rates had to go higher that the pivot that we're now seeing at the FED and other developed country central banks

and developing countries, it was necessary. The simple fact of the matter is the dynamic of the pandemic, the on again off again economy, the restart, the logistical supply chain problems. They've all added up to a level of inflation that requires central bank attention, and now they're speaking to that as well as acting with acceleration of the taper. There are a lot of cross currents. Though the fiscal policy

sequentially is going to become less stimulative. The news this morning from Senator Mansion basically bailing on the build back better plan is another point in that direction. Um, So I wouldn't be worried that we're about to go through skyrocketing rates. I think that's highly unlikely. Uh. And then the omicron slash delta wave that we're all dealing with is another sort of bond friendly development. So you know,

it's sort of clear as mud. But I think that the simple fact the matter is we do believe yields will be somewhat higher than the art today, but there's plenty of reasons not to go max short at this point in time. Yeah, talk to us about that r J, because it's so interesting when, as Paul was saying, the call was two percent yields and we're down below a one fort on the tenure and below two percent, well

below two on the thirty year. Is it that we have a central bank who is now less tolerant of inflation and so long term we're thinking lower growth, lower inflation or is this some technicals. I think that there's a number of factors out there. First of all, the fet worked really hard to get many to accept the idea that part of this inflation was transitory. That word now has basically been banned. UM, So let's use a different one that's probably not a clear clearly implying that

it would be brief episodic. I think there's something episodic about this inflation, but that's not explaining all of it. UM. I think the fact that the fet is is pivoted, has pivoted in the hawkish direction, has prompted some fears that they might overdo it. I mean, it's remarkable how the distance between the dots and the markets imply levels of short rates out a year or two, three years from now. It's pretty stark. H. Obviously, there's a mixed view on how fast the economy can grow and how

much the economy can tolerate of FED tightening cycle. Uh. It rains to be seen. However, how this one unfold makes it sort of tough for the bond managers of the world. I do think there's some silver lining for people who are afraid that they're going to experience massive bond losses. UH. They have to remember, you've already experienced losses on the Barkley's Aggregate, the U S Treasury Index, they're all down one over two percent on the year.

It's quite possible as yields rise in the year to come, I expect returns to be low, that's for sure. UM. But some of the rising rate dynamics behind us. And the question is where is that terminal rate? The markets pricing at very low terminal rate. We think it's probably a little too low. We're a little short as a result, and that's how we're dealing with this sort of foggy picture in front of us. R J. Are you of the Are you in the camp that central banks perhaps

have been moving to slow on inflation? UM? I think yeah, yeah. I think the simple fact of the matter is that the FED in other eras, the FED wouldn't have accelerated the taper, they would have just stopped buying bonds. Uh. There's abundant reasons to argue that that that they should do that, and they should have done at the last meeting. But in the current central banking framework, the FET doesn't

like to surprise the markets. They viewed that as destabilizing. UH. It would unsettle risk assets which have been on a tear. So I think the FED has to move very sensitively gingerly is probably a better word, uh in in their pivot, and so far they've pulled it off. It's interesting that risk assets are now struggling because I think people are concerned about the idea of a policy error, that the FED is going to overtighten, that their doughts are too aggressive.

Economy can't take it, like I was saying before, But yeah, I think the central banks probably waited a little too long. But can you blame them. The uncertainties that we face as an economy as a society keep thing. It's hard to charge forth with great confidence, whether you're a public health official or a monetary policy official in the context of a world that's changing as the pandemic continues to to change over Now you know, r J, we just

have about thirty seconds left. When will we know when we are past the point of having to worry about a policy error. That's a great question. I I personally think Chairman Powell laid out of you that if inflation isn't materially declining mid to late next year from its very high rates that we currently see, um, that's where the FED might start to get more aggressive and and the policy error judgment we'll only become apparent sort of

as it's happening. Recalled the fourth quarter of twenty team, when the FED was tightening and the balance she was shrinking. The stock markets were, you know, they were screaming Uncle, they couldn't take it. Stock markets quarter, That's when the policy error trade becomes evident. It's sort of real time, all right. R J. Thanks so much for join Instagrams. Appreciate getting your thoughts on the credit markets. R J. Gallop, Senior portfolio manager for Federated Hermes, giving us his thoughts

on these credit markets. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio