Q1 2024 finished with about 2% real economic growth, with inflation running about 3.5%, which remains higher than the Federal Reserve’s wished for 2.0% goal, although arguably is not realistic and may have been established to give Chairman Powell flexibility going forward. Overall, this result seems in line with a so-called soft landing--so why is everyone so unhappy? Most likely because prices remain well above 2019 levels without much clarity for the future. Plus, like it or not, uncertain worldwide geopolitics outside of our control have a larger impact on our growth than normal.
On the positive side, the well-intentioned Inflation Reduction Act should have been titled the Inflation Reduction Later Act, since the spending related to Artificial Intelligence infrastructure benefits both old and new energy fuels working together and will hopefully reduce both long-term energy costs and pollution. Another positive is that unemployment remains generally very low under 4%, although wages for most lower and middle income classes are not sufficient to keep up with the cost of housing or owning and maintaining an automobile. Those consumers are the heart of our c-store customer base and often our employee base.
The Federal Reserve’s attempted control of different bond maturity rates called “yield control” designed to indicate tight money and credit restrictions that typically have led to recessions. However, this blow has been softened by alternating between Quantitative Tightening and Easing to fine tune the economy and inflation. Eventually, consumer and business confidence always remain the main economic drivers. Right now, the goal appears to be ample credit but at higher rates than hoped for by many.
The elephant in the room is that the U.S. Government’s ratio of official debt to GDP is now at new high levels usually not seen by the stronger world economies. Japan’s similar difficulties in the early 1990’s led to limited growth for many years. Japan is again having difficulties because they are experiencing a declining and aging population and, with no immigration to speak of, it is getting more difficult to grow which even is reflected in their Yen currency. This can adversely impact our interest rates here if Japan now becomes a market borrower, especially because even at $85/barrel, large oil producing countries like Saudi Arabia and the UAE are also becoming net borrowers. Since 85% of world trade is conducted in US Dollar terms, pressures on interest rates are much harder to predict and can get out of control. Taxes can be raised to better balance the budgets if the changes are small enough, but if that hurts growth because the deficits are so large, raising taxes can be counterproductive. Probably the best US economic scenario right now would be slow but stable non-inflationary growth with interest rates staying in their current range. The worst scenario would be a slowing economy; yet still high or even rising interest rates would make the fiscal deficits worse. Real estate in some sectors like commercial office buildings are already under pressure, and real estate values are the backbone of most countries, and certainly impact c-store industry valuations and multiples as well.
The other elephant in the room has been China, which has suffered through their own serious real estate mistakes and is trying hard to stabilize their interest rates and subsequently their currency to become credible in the world marketplace again. They are a serious competitor to the technology leader, the U.S. They already have a huge market share lead in solar panels and related technology, and it appears that their next target is the automobile industry. Their stated objective is to become number one in technology. The costs that the U.S. incur being the world’s policeman are very high. The rising deficits in the free world could wind up raising interest rates at a bad time, just to be able to continue borrowing.
When you put everything together with today’s crosscurrents, the confusion does not breed happiness, even though things like medical technology, artificial intelligence, etc. are fantastic long-term advances for society.
Our own gasoline c-store industry continues very strong relative to almost all box store retailers, except maybe the strongest in their respective groups, such as Dick’s Sporting Goods, or Lululemon, many of which offer great online opportunities to supplement the box shoppers. So far in 2024, our industry has seen some softness in both volumes and fuel margins, but with airfares very expensive and airplane capacity limited by Boeing’s problems, summer traffic should be strong. However, it may not be as easy to pass through labor and increases as it has been in the Covid years. That trend is showing up in many areas, but it varies quite a bit.
M&A buyers and NTI builders have more issues to consider these days from higher interest rates increasing risks, making the most recent growth trends in volumes and profits by company more important than typically averaging a few periods. Taken together, these do not change the desire to grow, but generally favor larger companies with economies of scale and buying power, including the cost of funds. Smaller firms must know their strengths and keep re-enforcing them with their customer base. The current levels have not weakened M&A and arguably buyers of quality assets still exceed sellers. At least today’s sellers shouldn’t have to worry about higher capital gains taxes in the future, and they will receive better returns from cash than has been seen in many years, hopefully at least exceeding inflation. Those who remain in business can await better opportunities at some point in the future, especially if you have good real estate and a good game plan, but remember that credit will have to be watched more carefully.
JEFF KRAMER
Managing Director
(303) 619-0611