Listening to the mood music in Music City

Hugh Grieves
Premier Miton US Opportunities & US Smaller Companies Funds

Walking in Nashville

Walking through a shopping mall in Nashville on a recent research trip, the first thing you notice is the ever-present sound of country music. The city is pitching itself as being to music, what Las Vegas is to gambling. Country music is everywhere.

The second is just how many shoppers are out spending.

The typical US consumer appears in pretty good shape. With jobs plentiful and little to fear from higher mortgage rates (American mortgages are typically fixed for thirty years), consumers are active. They have significant savings accumulated during lockdown when people could not go out and spend money, further boosted by generous government handouts also hoarded.

This cash all seems to be burning holes in people’s pockets. Even though energy prices may be a little higher, and a drag on disposable income, increased energy prices are much more of a European problem than a US one.

Employment in abundance

The next thing you notice is the number of job vacancy notices in the windows of shops and restaurants everywhere. Despite fears of a Federal Reserve (Fed) induced economic recession, demand for workers remains extremely high. In fact, nationally there are nearly two job openings for every person looking for work. But this is putting upward pressure on wages which the US central bank, the Federal Reserve, worries will turn into an inflation spiral whereby companies have to offset higher costs with higher prices, in turn forcing workers to ask for even higher wages.

As a British traveler, I can quickly see how much more expensive items are compared to before the pandemic, especially when translated back into my diminished British pounds.

Fed rate rises cooling?

The bad news is that to reign back inflation the Fed has already sharply raised interest rates several times, and promises to raise more, to help cool the economy and get inflation down. Investors worry though, that it will cool the economy too far and trigger an economic recession and a fall in corporate profits. Global share prices have fallen as a result.

The good news though, is that price increases appear to have stabilised in recent months, although the year-on-year rate of change remains high. Inflation in America peaked at 9.1% in June but has now fallen to 7.7% (CPI). While wages may still be rising, falling energy prices, logistics costs and raw material prices are taking the pressure off companies’ margins. If this continues, and inflation continues to fall, reaching a level that the Federal Reserve can tolerate, then the likelihood of a recession is dramatically reduced and the 2024 outlook for US company profits would be much improved.

‘The Gulch’ gets a make-over

The other major change I saw in Nashville since my first visit six years ago, is how much construction has been going on. Nashville is booming. On my earlier trip, I walked through an area called ‘The Gulch’ which back then was a huge brownfield area centered on the old railroad marshalling yards, filled with semi-derelict warehouses. It is now being transformed into an upmarket neighbourhood of fashionable boutique shops, chic hotels, and trendy restaurants.

Outside the city, as in many American cities, construction is also booming. With Covid problems in China and energy security issues in Europe, American companies are building at home. After years of manufacturing moving offshore, typically to the Far East, we are witnessing the reshoring, or near-shoring of production, all of which requires significant investment in factories, warehouses and infrastructure, as well as new workers.

Intel alone is spending $20bn on two factories in Ohio. Construction spending is being further boosted by Federal government spending announced following the pandemic; the Infrastructure, Investment and Jobs Act provides $371bn for transport infrastructure spending and the Inflation Reduction Act provides $391bn for investment in clean energy infrastructure.

One company I met with in Nashville, which installs plumbing and electrical equipment for new buildings across America, told me that they are so busy that they are turning business away.

As usual, I come back from the United States buoyed up by the American sense of enthusiasm and positivity. But for this trip, the pessimistic views of Wall Street’s economists and market seers seem particularly out of tune with the upbeat views from the streets of Nashville.

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