Jif is America's deflationary problem
EDITOR'S NOTE
Shares of Smucker's are taking a hit today, down nearly 9% after the company missed on sales in its quarterly report this morning and lowered its full-year earnings forecast.
It turns out they're having to cut prices across pretty much all categories--coffee, peanut butter, pet food--to keep people buying. In other words, they're dealing with the dreaded d-word: deflation.
This is the kind of earnings report that'll keep Federal Reserve policymakers up at night. But Smucker's struggles also look somewhat self-imposed.
I went to have a look at their brands. And--I hate to say it--the list is not super inspiring. Jif, Smucker's, Crisco and a handful of smaller offerings like Santa Cruz Organics in foods. Folgers, Dunkin' packaged coffee, Cafe Bustelo and a couple others in coffee. Milk-Bone, Meow Mix, Kibbles 'n Bits in pet food...except for Rachael Ray Nutrish, it's all pretty old-school in a category that's gone super premium and healthy in recent years.
That's not to say this isn't telling us something about the U.S. economy. Just a couple of weeks ago, J.P. Morgan warned: "The noose tightens around corporate profit growth." That was after annual revisions showed that U.S. corporate profits actually fell 2.2% year-on-year in the first quarter of 2019, compared with the 3.4% gain that was previously reported.
Profit margins, in fact, have been compressing over the last couple years even with a stronger economy. That's partly because revenue growth has been slowing. It's also because--and this gets back to the issue with Smucker's--unit labor costs have been increasing around 2.7% annually since 2015 but, as J.P. Morgan notes, prices are only rising around 1.6% a year.
The only way out of that trap, if you're a company (or an economy), is to make sure your products have pricing power. And that requires big-ticket, long-term investment--in new products, in marketing campaigns, and so forth.
And that's the irony with the tariff uncertainties hanging over the economy right now. Instead of tariffs causing price inflation, they're risking deflation because businesses may hold off on that investment until the uncertainty passes.
The Federal Reserve, obsessed with avoiding entrenched deflation, is now stuck trying to figure out how and whether to get ahead of that outcome. Bill Dudley, the former New York Fed president, is now saying they shouldn't bother--because it could help Trump's reelection! Pretty shocking stuff, if you ask me.
We'll have more at 1 p.m. See you then!
Kelly
KEY STORIES
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