Marketplace Podcast Summary: "The Negative Wealth Effect"

Release Date: April 1, 2025
Host: Kristen Schwab
Host for this Episode: Kristen Schwab in place of Kai Ryssdal

Introduction

In this episode of Marketplace, host Kristen Schwab delves into the nuanced impacts of economic shifts on various sectors, highlighting the negative wealth effect. The discussion spans the labor market's stability, the repercussions of new tariff policies, the auto industry's pivot away from subcompact cars, and the broader psychological effects of declining stock markets on consumer behavior. Additionally, the episode features firsthand accounts from small business owners and farmers navigating these turbulent times.

Labor Market Stability Amid Uncertainty

Jolts Report Overview Kristen begins by discussing the latest Job Openings and Labor Turnover Survey (Jolts) from the Bureau of Labor Statistics, which indicates a steady labor market:

• Job Openings: 7.6 million (February), unchanged from January.
• Hires: 5.4 million (February), steady from the previous month.
• Quits and Layoffs: Minimal changes observed.

Key Insights:

• Stable Labor Market: Overall, the data suggests a consistent labor environment despite broader economic uncertainties.
• Small Business Layoffs: An uptick in layoffs among businesses with fewer than 10 employees, signaling potential vulnerabilities.

Notable Quotes:

• Ron Hetrick, Senior Labor Economist with Lightcast:
  “[05:03] “Everybody just freezes, really. Small businesses, though, were laying off workers at a higher rate than anyone else.””

• Pavlina Cherneva, Economist at Hubbard College:
  “[03:06] “That's an indicator to watch because even though firms with fewer than 10 workers represent just about one eighth of total employment, to me their behavior is a bellwether for overall trends in the economy.””

Analysis: Economist Lindsey Owens explains that small businesses, lacking the financial buffers of larger firms, respond more swiftly to economic changes by adjusting their workforce. This behavior is critical as it often preludes broader economic trends.

Impact of New Tariffs on Businesses

President Trump's Tariff Announcements The episode shifts focus to President Trump's recent announcement of a 25% tariff on imported vehicles, light trucks, and auto parts, set to commence on April 2, dubbed Liberation Day. The uncertainty surrounding additional potential tariffs creates significant challenges for importers and businesses reliant on foreign components.

Business Perspectives:

• Logistics Plus Insight:
  Lindsey Owens, Customs Broker Manager at Logistics Plus, Erie, PA, discusses the complexities of navigating the new tariff landscape: “[05:50] “We have the steel and aluminum tariffs that are in effect, and then we have a bunch of other tariffs that are going into effect tomorrow... It gets a little.””

• Operational Challenges:
  The need to meticulously break down components to apply tariffs correctly has placed importers in a precarious position, balancing between storage costs and unforeseen tariff expenses.

Notable Quotes:

• Lindsey Owens:
  “[09:15] “It's really hard to plan when... you don't know what's going to happen from day to day sometimes.””

• Gretchen Blau, Customs Broker Manager:
  “[08:56] “Buy America. It's not always the alternative... it’s going to take some time to build the plants and get things operational.””

Consumer Sentiment: Despite public pressure to “buy American,” the pragmatic challenges of sourcing domestically are evident, as many products still depend heavily on foreign components. The uncertainty hampers long-term planning for businesses, forcing a reactive rather than proactive approach.

Automotive Industry Shifts Away from Subcompact Cars

Decline of Subcompact Models The auto industry is witnessing a strategic move away from subcompact vehicles, with major manufacturers like Mitsubishi and Nissan discontinuing models such as the Mirage and Versa. This trend reflects shifting consumer preferences towards larger vehicles like SUVs and trucks.

Market Dynamics:

• Affordability vs. Demand:
  While smaller cars are more affordable, consumer preference is tilting towards vehicles that offer greater cargo capacity and versatility.

• Profitability Factors:
  Larger vehicles present higher profit margins for manufacturers. Patrick Olson, Editor-in-Chief at Carfax, points out that bigger SUVs and pickups can be produced on similar platforms as smaller cars but fetch higher prices due to demand.

Notable Quotes:

• Jessica Caldwell, Head of Insights at Edmunds:
  “[13:00] “It's just that a large enterprise is like a supertanker, it takes time to turn around... making it easier to meet those standards than it is for the smallest of vehicles.”””

• Patrick Olson:
  “[13:35] “A lot of Americans are dealing with financial difficulties right now... Automakers have responded to that declining demand by dropping smaller vehicles from their lineups.””

Regulatory Influence: Federal fuel economy regulations incentivize manufacturers to produce larger vehicles, as meeting mileage standards is more straightforward with bigger models. This regulatory environment further accelerates the decline of subcompact offerings in the market.

Consumer Impact: The reduction in affordable small cars presents challenges for cost-conscious consumers, who may find it difficult to purchase larger, more expensive vehicles amidst rising economic pressures.

The Negative Wealth Effect and Consumer Behavior

Stock Market Declines Krisen opens a discussion on the negative wealth effect, where declining asset values (stocks and investments) lead consumers to feel less wealthy and subsequently reduce spending.

Market Performance:

• Stock Indices:

  • Dow Jones Industrial Average: Slight decline to 41,989 points.
  • Nasdaq: Gained 150 points to close at 17,449.
  • S&P 500: Dropped 21 points to end at 56,330.

• Corporate Moves:

  • Capital One's Acquisition of Discover: The DOJ nears approval, impacting financial stocks.
  • Rocket's Acquisition of Mr. Cooper Group: Shares rose by 4% and 6%.

Expert Insights:

• Kathy Bostjancik, Economist at Nationwide:
  “[20:06] “There'll be a psychological impact when you see this sharp decline in equity prices.””

• Sam Stovall, CFRA Research:
  “[20:18] “A sharp decline followed by a quick rebound... doesn’t usually lead to a prolonged downturn.””

Despite historical resilience, the emotional toll on smaller investors, particularly those nearing retirement, is significant. Olivia Mitchell from the Wharton School underscores the heightened anxiety among individuals aged 55 and up, whose retirement accounts are particularly vulnerable.

Notable Quotes:

• Olivia Mitchell, Wharton School:
  “[21:00] “A lot of financial advisors advocate just ride the bumps, you'll be all right in the long run.””

• Rob Hayworth, U.S. Bank Asset Management:
  “[21:06] “Mitchell is over 70 and not really listening.”” (Highlighting skepticism towards traditional advice.)

Consumer Spending Resilience: Contrary to expectations, declines in stock markets do not always translate to reduced consumer spending. Robust employment and income growth often counterbalance the negative sentiment stemming from investment losses.

Agriculture Sector's Struggles with Trade Policies

Farmer Sentiment Index Declines Kristen reports on the Purdue University Farmer Sentiment Index, which shows a dip in March, signaling farmers' growing concerns over trade policies.

Key Drivers:

• Trade Policy Anxiety:
  Over 40% of farmers cite trade policy as their primary source of pessimism, fearing retaliatory tariffs that could diminish export opportunities for crops like corn, soybeans, and barley.

• Expectations for Relief:
  Two-thirds of survey respondents anticipate federal relief measures similar to those implemented during the previous trade war, hoping for financial support amidst declining market conditions.

Notable Quotes:

• Kristin Owen, Managing Director at Oppenheimer:
  “[22:17] “Compensation like the billions in federal relief paid to farmers during the last Trump administration trade war.””

• Josh Gackle, American Soybean Association:
  “[23:10] “Farmers would much, much rather have an open and fair and free market that we can sell our products to.””

Community Impact: In rural areas, the local economy is tightly interwoven with agricultural performance. Discussions among farmers about crop prices reflect widespread anxiety, as shifting trade policies directly influence their livelihoods.

Service Industry Challenges: A Case Study of a Vinyl Listening Bar

Bad Medicine in Cleveland, Ohio The episode features Brian Tetrakis, co-owner of Bad Medicine, a unique vinyl listening bar facing operational challenges amid rising costs.

Operational Insights:

• Cost Management:
  Rising prices of key ingredients, such as eggs used in cocktails, force the bar to innovate with alternatives like Aquafaba (chickpea water) to maintain product quality without increasing prices.

• Financial Strain:
  Initial months were financially negative due to high expenditures associated with establishing the business. However, recent months have shown positive cash flow as the business stabilizes.

Notable Quotes:

• Brian Tetrakis, Co-Owner of Bad Medicine:
  “[26:20] “The bar has been negative the first couple months, but it was predominantly because we were doing so much spending as we were learning the space.””

• Lindsey Owens:
  “[15:07] “At least until the summer. Bedard expects to have Mirages available on his lot after that.”” (Note: Context might refer to another segment; ensure quotes are correctly attributed.)

Creative Outlet and Personal Fulfillment: Brian emphasizes the importance of the bar as a creative outlet, providing personal satisfaction that contrasts with the financial pressures of running a business under current economic conditions.

Automotive Sales Surge Ahead of Tariffs

Ford's Retail Sales Spike In a final economic highlight, Kristen reports a noteworthy 5% increase in Ford Motor Company's retail sales last quarter, attributed to consumers rushing to purchase vehicles before the new tariffs take effect.

Details:

• Ford Maverick:
  The compact pickup truck set an all-time monthly sales record in March, underscoring consumer urgency to bypass impending tariff-induced price hikes.

Notable Quotes:

• Daniel Ackerman:
  “[14:51] “How much planning can you do for the next few months or the year ahead? Or is it just more of a day by day, in the moment kind of work?”” (Related to tariffs and business planning.)

• Lindsey Owens:
  “[15:30] “The biggest driver we see for consumer spending is really do people have jobs and are their incomes growing.”””

Market Implications: The surge in vehicle purchases reflects consumer attempts to mitigate the impact of rising costs due to tariffs, indicating a short-term shift in spending behavior driven by policy changes.

Conclusion

Kristen Schwab's episode on "The Negative Wealth Effect" offers a comprehensive exploration of how shifting economic policies and market dynamics influence various sectors. From the resilience and vulnerabilities within the labor market to the strategic pivots in the automotive industry, and the psychological ramifications of declining asset values on consumer behavior, the episode underscores the intricate interplay between policy, market forces, and individual livelihoods. Through expert analysis and real-world stories, Marketplace provides listeners with a rich understanding of current economic challenges and their multifaceted impacts.

Notable Contributors:

• Kristen Schwab: Host and Reporter
• Ron Hetrick: Senior Labor Economist, Lightcast
• Pavlina Cherneva: Economist, Hubbard College
• Lindsey Owens: Executive Director, Groundwork Collaborative
• Patrick Olson: Editor-in-Chief, Carfax
• Gretchen Blau: Customs Broker Manager, Logistics Plus
• Jessica Caldwell: Head of Insights, Edmunds
• Rob Hayworth: U.S. Bank Asset Management
• Olivia Mitchell: Wharton School Economist
• Brian Tetrakis: Co-Owner, Bad Medicine Bar
• Josh Gackle: American Soybean Association

For more insights and detailed discussions, tune into the full episode of "Marketplace."