Inflation, Rate Hikes Hurting Entry-Level Market

After the Federal Reserve fired its latest salvo against inflation by increasing interest rates by 0.75 percentage points yesterday, a recreation industry analyst said the low end of the boating market is beginning to suffer.

“Obviously, in a tightening rate environment and expectations for slowing economic growth and the consumer pulling back on spending, it doesn’t bode well for discretionary purchases,” Michael Swartz, director of equity research at Truist Securities, told Trade Only Today yesterday after the rate hike.

The Federal Reserve increased the federal funds rate to 2.25 to 2.5 percent yesterday. After two consecutive 75-basis-point hikes, chairman Jay Powell said the pace of increases may slow for the remainder of the year. That helped U.S. stocks surge by the end of trade yesterday, with the Nasdaq Composite gaining 4.1 percent and the S&P 500 adding 2.6 percent.

“Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low,” the Fed said in its statement. “Inflation remains elevated, reflecting supply-and-demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

The food and energy inflation have stymied consumer discretionary spending among Americans who would be candidates to buy entry-level boats, Swartz said.

“The dealers have not seen a slowdown in demand writ large,” he said. However, the “lower end of the market is starting to show signs of slowing down. That consumer pulls back, and the $600-a-month boat payment is just not feasible.”

Otherwise, boatbuilders and retailers still enjoy an overall customer base with gainful employment, higher incomes, and ample savings and credit availability, Swartz said. A lack of boat inventory remains a more significant problem than the economic conditions, he said.

“That has been the biggest pressure point for the past year, and it hasn’t gotten any better this year,” Swartz said.

In his press conference after the hike announcement, Powell said it is improbable that the U.S. economy is in a recession, but he said the next likely stage is “growth below potential” and “some softening in labor market conditions.”

This morning, the Commerce Department reported that U.S. gross domestic product declined by 0.9 percent in the second quarter. It was the second consecutive quarter of lower GDP, which meets the technical definition of a recession although other indicators do not point to a recession at this time.