US housing leads tumble
There is no disguising the fact that the United States has now suffered two successive quarters of declining output, defined as a technical recession. At such moments, the aphorism ‘when America sneezes, the world catches a cold’ comes to mind.
The annualised fall in output in the second quarter, coming on top of the drop of 1.6pc in the first three months of the year, came as a surprise with economists predicting an upturn.
The assumption is that the Fed chairman Jay Powell has some sight of the numbers before raising interest rates by 0.75 of a percentage point on Wednesday.
If that is the case, there must be enormous concern that inflation, running at a 9.1pc clip, is embedded deeply and it is too soon to ease the brakes.
President Biden’s problems are those of Britain too. The US is Britain’s biggest single trading partner. We run a surplus in our commerce with the US and it is also the biggest inward investor in the UK. Like it or not, several of the current raids on aerospace industries, including the bids for Inmarsat and Meggitt, are from US buyers. As worrying is the political fallout from an unexpected American downturn this week, with Donald Trump in Washington teasing his supporters about a fresh run for the White house.
The sources of the US economic weakness could provide clues to what will happen here. A big contributor to the slowdown was a buckling housing market, under pressure from rising mortgage rates. Consumer spending is hurting from the cost of living.
If there is a puzzle, it is one shared with the UK.
how is it possible that America is in recession when the jobs market is so buoyant, with 456,700 a month joining the workforce in the first half of the year, leading to strong wage gains and spending power? One possible explanation is that the work- shy labour force of Covid-19 is finally returning to the land of the living.
Britain’s booming residential market has shown little sign of being cooled by higher interest rates. That may well be down to the preponderance of fixed-rate loans. In the US, refinancing of mortgages is a national hobby, so higher home loan rates quickly feed into behaviour.
earlier this week, the International Monetary Fund slashed its forecasts for global output, citing Ukraine and China. Those projections are already looking dated.
Whisky galore
US inflation and recession is not so far having much impact on demand for Johnnie Walker scotch or Casamigos tequila.
Amid the gloom, American families are still popping out to the liquor store five or six times a year, tempted by Diageo’s top brands. When chief executive Ivan Menezes splashed £1bn or so on Casamigos back in 2017, he encountered criticism.
In the 2022 financial year, Casamigos sales sprinted 89pc, contributing to net sales growth of 14pc. Appetite for the group’s most famous brand, Johnnie Walker, is undiminished with premium Blue Label, selling for about £200 a bottle, showing a 60pc increase. Diageo has become a cash machine with operating profits of £4.4bn last year up 18.2pc. It, like other global companies, faces higher input costs. Margins slipped slightly with the company absorbing some of the cost rather than raising prices on a portfolio of very premium products.
Marketing spend continues to rise and this year Diageo is doubling its capital spend on distilleries and breweries to some £1bn. There is still plenty of cash in the kitty to raise the dividend by 5pc and snap up brands as the fashion for new wave spirits gathers momentum.
As for Menezes, after nine years in the job he has reinforced the executive team by promoting former US boss Debra Crew to chief operating officer to push efficiency.
But he is showing no signs of putting away his snifter just yet.
Moral maze
InveSTMenT banking is both the virtue of Barclays and its downfall.
It continued to consolidate its position as europe’s top player, with income up 35pc in the second quarter, when Wall Street rivals reported declines. The first half was spoiled by £1.9bn of regulatory costs. If only newish boss CS venkatakrishnan could eliminate ethical mishaps, Barclays could be the most exciting firm in the sector. The mixed legacies of Bob Diamond and Jes Staley live on.