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At a time of 40-year-high inflation and concerns about a recession, economic data is being watched closely. Here's a look at the latest updates from a busy week of reports, including an announcement from the Federal Reserve about the latest interest rate hike:
Fed decision: 0.75% rate hike
When the Federal Reserve announced its decision on whether to hike interest rates on Wednesday, the result was the same as June’s meeting: A 0.75% increase in the benchmark rate.
The primary reason for the hike, according to Federal Reserve Chairman Jerome Powell: Data continues to show inflation is still high. The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, rose 6.3% year-over-year in June. The Fed’s target for that rate is 2%. So, it once again made a move to raise rates, as expected.
Here’s how Powell described the current economic situation:
Notwithstanding the recent slowdown in overall economic activity, aggregate demand appears to remain strong, supply constraints have been larger and longer lasting than anticipated, and price pressures are evident across a broad range of goods and services. Although prices for some commodities have turned down recently, the earlier surge in prices of crude oil and other commodities that resulted from Russia’s war on Ukraine has boosted prices for gasoline and food, creating additional upward pressure on inflation.
This came with an acknowledgement by Powell that the Fed believes a slowdown in growth of economic activity is necessary to rebalance supply and demand. It has likely yet to arrive.
“These rate hikes have been large and they’ve come quickly,” Powell said. “It’s likely that their full effect has not been felt by the economy so there’s probably some significant additional tightening in the pipeline.”
However, Powell said he doesn’t believe the economy is in a recession. This is because the labor market is strong. Employment has been holding steady at 3.6% for a few months, and the economy added 372,000 jobs in June.
As for future rate hikes, Powell said the Fed is taking its decisionmaking on a “meeting by meeting” basis. The committee that makes decisions next meets in September. Powell said that “another unusually large increase could be appropriate” at the next meeting, but that will depend on economic data released between now and then. However, he said a slowdown in rate hikes will eventually be necessary.
“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.
The guiding principle of monetary policy at the moment: The Fed is “strongly committed to returning inflation to its 2% objective.”
The latest news hits on two levels. For one, the hike in the interest rate will make borrowing money more expensive, affecting loans as well as personal credit that can affect consumer activity. In the bigger picture of the economy, the Fed said it is engineering a slowdown in order to bring prices down, and stabilize them. Powell said this is necessary to get prices down and create a healthy labor market over the long-term. In the short-term, however, it could mean some pain. Americans are already bracing for it, even as they face months on end of higher prices for gas, food and other essential goods.
Consumer confidence falls
The Conference Board's Consumer Confidence Index. (Courtesy photo)
When it comes to how consumers are feeling about the economy, the trend line is pointing down.
Consumer confidence fell to its lowest level since February 2021, dropping for the third consecutive month, according to the Conference Board. The organization's index surveys consumer attitudes, spending plans, and expectations about the economy.
Survey results showed mixed feelings about the current situation and the labor market. But consumers were more pessimistic about their short-term financial prospects.
“Concerns about inflation—rising gas and food prices, in particular—continued to weigh on consumers. As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July,” said Lynn Franco, senior director of economic indicators at The Conference Board. “Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.”
Durable goods orders rose in June
Orders from manufacturers for durable goods increased 1.9% in June, according to US Commerce Department data released Wednesday.
Durable goods are items that are meant to last at least three years. Key categories that showed movement include:
- Driving the increase: New orders of transportation equipment were up 5.1%, while new orders of defense aircraft were also up.
- Increases were also reported in new orders for motor vehicles, computers and electronics and fabricated metals.
- A decrease in new orders was observed in machinery and communications equipment.
The figures are not adjusted for inflation. Still, this indicator’s headline increase is a sign of activity continuing ahead. New orders rose 0.8% in May, and they’ve risen in eight of the last nine months.
A few more indicators released this week:
- Retail inventories, which are in focus as retailers like Walmart and Target work through overstock, rose 2% in June compared to the month prior, and 19.9% year-over-year.
- Wholesale inventories rose 1.9%, and 25.6% year-over-year.
- The international trade deficit fell $5.9 billion from May to June. Exports rose by $4.4 billion, while imports were down $1.5 billion.
Trending in Economy
On average, customers spend $59 more than the value of their gift card, Fiserv found.
In retail, sales are often measured in goods, whether they are purchased for ourselves or someone else. There are plenty of strategies that brands and retailers use to increase those sales, whether it is marketing, loyalty programs or how that item is presented.
In most cases, these are two different parts of the equation for retailers: The product that is bought and the strategies that lead to the purchase.
That’s what makes the gift card unique.
It is an item you can buy, with a section in the store all its own. Eventually, it leads to the purchase of other goods, so the gift card is leads to a direct sale. Yet it’s also a means to build a retail brand and create incentives that both introduce customers to a store and keep them coming back.
That’s a key takeaway from the 20th Annual U.S. Prepaid Consumer Insights Study from fintech and payments company Fiserv.
At this point, the gift card feels like a staple of the shopping experience. But it is only about 30 years old. In 1994, Blockbuster Video pioneered the sale of cards for gifted purchases directly as a means to combat fraud in paper gift certificates. Since then, they’ve proven to have a multitude of uses that stretch beyond the holidays.
Starbucks and Amazon gift cards are commonly distributed as prizes at team-building events and as pick-me-ups by friends showing they care. In 2022, 60% of consumers said they received a gift card from an employer, according to the Fiserv report. That was a big increase from 32% in 2019. People appreciate the gesture. The survey found that 85% of employees think that gift cards from an employer make for appropriate incentives.
For people looking to show generosity, gift cards can also be a means to stretch dollars. At a time of high inflation, people are looking for deals with their discretionary purchases. Gift card promotions that offer discounts and bonuses are proving particularly popular, the study found. Two-thirds of consumers said promotions can influence them to purchase more, while more than half of consumers took advantage of such an offer in 2022.
Yet the more difficult consumer environment is also having an impact on overall gift card sales. In 2022, the growth of gift card purchases slowed.
“Overall, 56% of U.S. consumers purchased more gift cards in 2022 compared to 2021,” said Tom Niedbalski, VP of gift solutions at Fiserv. “This was a decline from the 73% of consumers who said they bought more gift cards in 2021 than they did in 2020.”
Inflation and less discretionary income were the driving factors for consumers who said they bought fewer gift cards during 2022, as 35% of consumers said inflation was the reason they were purchasing fewer cards.
It's important for brands and retailers to understand why consumers buy gift cards. But it's just as crucial to understand where they can fit in retail strategy. Beyond sales, gift cards can help drive repeat customers, and extend a brand. These tools are particularly valuable at a time when retailers are focused on profitability in a tougher consumer environment.
Fiserv explained four areas in which gift cards are of particular value for brands.The following is directly quoted from Niedbalski:
Improving cash flow and revenue. Gift cards not only drive in-store and online traffic, there is an associated “lift,” or overspend, when a gift card is converted into a sale. On average, customers spend $59 more than the value of their gift card.
Repeat customers. Retailers use gift cards to foster loyalty and customer engagement, ultimately leading to repeat customers. One way we see this play out is through promotions associated with gift card sales. For example: a consumer who buys a $100 gift card for the holidays will receive a $20 bonus card that can be used after January 1 – creating a pre-holiday sale and post-holiday transaction in the New Year.
Branded currency. A gift card places a merchant’s brand directly into the consumer’s wallet, increasing brand awareness and ensuring the merchant’s brand is with the consumer when they are looking to buy.
Year-round marketing. The gift card has grown beyond the traditional holiday season. From birthdays and graduations to anniversaries and babies, gift cards are becoming the most popular way to recognize milestones – giving retailers opportunities to run additional promotions throughout the year.