This past Monday afternoon, I attended a memorial service in Charlotte for a fraternity brother of mine. Given the relatively short lead to time to make arrangements and the overall quality of airline service out of Birmingham, it made more sense for me to make the drive. Flights connecting anywhere didn’t save me any time, and direct flights cost a prohibitive amount of money. Further, I couldn’t take the risk of XYZ airline cancelling my flight, which has happened at least twice over the last 12-months.
No worries. I have made the drive up I-85 countless times in my life. There is far more congestion than there was the first time I did so in 1986. However, with a little luck, you can still make it from our downtown to their downtown in about 6.5 hours. Not fun, but certainly doable, all the more so on a Sunday afternoon.
Most people from Birmingham would probably agree that if you miss the fuel/food options at Exit 11 in Bremen, Georgia, you might as well wait until you get through Atlanta. Even Villa Rica is now a bit of a stretch. If I am driving north on I-85, I normally try to tough it out until Exit 173 in Toccoa/Lavonia, which is sometimes a stretch. If I am on I-20, I usually push it to Exit 172 in Thomson, but have occasionally stopped in Covington. Finally, heading south on I-75/85, I have been sorry every time I have gotten off the interstate prior to Macon.
If that last paragraph seems strange to you, please give me a shout the next time you visit or drive through Birmingham.
With this as a backdrop, I pulled off I-85 North at Exit 173 in Georgia at some point in the mid-afternoon last Sunday. There is a McDonald’s quite literally at the top of the ramp. I mean, you drive directly into the parking lot if you go straight through the light. Since fast food restaurants are basically fungible in my book, I took the path of no resistance and went through the drive-thru at the Golden Arches.
Fortunately, there were no other cars in line, and I was in and out of there in, seriously, about 3 minutes. Come to think of it, there weren’t many, if any, cars in the parking lot either. Admittedly, this was between normal meal times, but even so. A completely empty McDonald’s right off a busy interstate, regardless of the time, is a little unusual.
In case anyone was wondering, and I doubt many were, I ordered a McChicken sandwich and a small fry off the so-called value menu. Okay, who am I kidding? I had two McChicken sandwiches and a small fry. Sorry mom. You tried, honest you tried.
Corporate Earnings
You might be thinking: “okay, Norris, we know what you were doing and eating this past Sunday afternoon. So what?” Well, this past week, McDonald’s released its most recent earnings report. Necessary caveats at the end. Although investors basically took it in stride, it wasn’t a great report. The company missed on both earnings and revenue. Same-store sales fell, and there will be a renewed focus on value meals and the value menu to get folks back into the restaurants.
Of note are the following comments from senior executives on the recent earnings call:
“Beginning last year we warned of a more discriminating consumer, particularly among lower-income households…those pressures have deepened and broadened.”
“At the end of the day, we expect customers will continue to feel the pinch of the economy and a higher cost of living for at least the next several quarters in this very competitive landscape…”
“I think it’s not even so much about consumers moving from us to others…It’s about consumers in that low-income category, and I think families, which are obviously two big cohorts of our consumer base across most of our markets, just eating out less frequently than they have been previously…”
These sorts of comments remind me of what my new friend Ralph from Clarksville told me in Sellersburg, Indiana, a couple of months ago about eating at Cracker Barrel:
In truth, lower income households have been feeling the hurt for a long time now. It has been an open secret, as an increased number of closed fast food joints and empty parking lots have suggested as much. However, the pain wasn’t readily apparent in the official economic data and earnings reports until relatively recently.
Labor Markets
This morning, the Bureau of Labor Statistics (BLS) released “The Employment Situation – July 2024.” I will cut to the quick. It wasn’t the worst jobs report I have ever seen, but it was still pretty weak. Sure, the BLS reported the U.S. economy created 114K net, new payroll jobs last month, and any job growth is better than the alternative. However, that is about it for the good news.
- The official Unemployment Rate ticked up to 4.3% from 4.1% in June. Obviously, that isn’t desired.
- Also, Average Hourly Earnings were up only 0.2%, which was lower than expected and basically in keeping with or below inflation.
- On top of that, Average Weekly Hours (worked) fell from 34.3/week to 34.2/week.
- That might not sound like much, but the combination of those two data points meant the “Average weekly earnings of all employees on private nonfarm payrolls” actually fell from $1,200.16 in June 2024 to $1,199.39 in July.
While that is essentially a rounding error, it means the average U.S. consumer didn’t get ahead last month. If the Consumer Price Index (CPI) is either flat or positive for July, it will mean the average U.S. consumer actually lost ground. Obviously, that is NOT a good thing in a consumer-driven economy.
However, there is more to it than that.
- The Unemployment Rate for U.S. workers who have “less than a high school diploma” shot up from 5.9% last month to 6.7% in July.
- The rate for those who are “high school graduates, no college” also increased significantly from 4.2% to 4.6%.
- Conversely, those workers with “bachelor’s degree and higher” actually saw their unemployment rate drop from 2.4% to 2.3%.
Then, there are the age demographics.
- The official Unemployment Rate for U.S. workers from 20-24 years of age has ballooned from 5.4% in April 2023 to 7.7% in July 2024. For grins, it was 7.7% in June, and 6.3% at the end of 2023. Not surprisingly, the number of unemployed workers in this age demographic has increased from 854K, 15 months ago, to 1.168 million last month. That is a 37% spike.
- Perhaps not surprisingly, the Unemployment Rate for workers 18-19 years old has been even worse, climbing from 9.6% in April 2023 to 13.5% in July 2024. This represented roughly a 40% increase of unemployed persons over that time frame. For grins, the increase, by this measure, has been over 23% since the start of the calendar year.
Armed with this data, I can confidently make the following statement:
“The U.S. economy has been softening, with younger and less experienced/skilled workers experiencing the brunt of the slowdown. While this is historically the case during periods of economic weakness, it appears to be more pronounced than normal.”
That isn’t to say older, skilled workers aren’t feeling the pinch as well. They are, at least to some degree. After all, I drove to Charlotte instead of flying. Further, I ordered off the value menu at McDonald’s instead of eating someplace more expensive. However, those that know me well know I can be, shall we call it, parsimonious, without rhyme nor reason. That sounds better than cheap, doesn’t it?
Interest Rates
All of this is to say, the Fed WILL cut the overnight rate in September. It has more than enough data to support the move. If it does NOT cut the rate next month, for whatever reason, I will charter a bus. We will drive to Jay Powell’s residence, roll his yard and soap his windows. It is time.
With that said, the data, to date, has NOT been bad enough to warrant a surprise, panicked move in-between meetings. For instance, this morning’s Employment Situation report wasn’t good, but it wasn’t the worst. Further, McDonald’s earnings’ release was disappointing, but it wasn’t a death knell for the company either.
So, in the interim, we should expect some market volatility over the next 6 weeks. The past two days have been beyond exaggerated. However, after an equally surprisingly strong July, perhaps investors are just a little more antsy than normal. I suppose that is understandable, and this too shall pass.
And, in the end, I hope it passes almost as smoothly as my drive to Charlotte, which was without incident and quicker than I had planned.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.
Further, Oakworth does NOT make a market in any securities, including those of McDonald’s Inc. (MCD). In the normal course of business, Oakworth may hold shares in MCD, but we do not own it in our primary investment strategies nor in any significant size. Finally, I do not own or have any sort of direct position in the common shares or debt of McDonald’s Inc.