Commentary
Could a small reprieve from inflation be on the horizon?Sagging consumer confidence and excess inventory could push the prices of some goods lower, with retail giants warning that their profit margins will be cut heading into the important fall shopping season.
The Conference Board, which measures the temperature of the U.S. consumer market, said its national consumer confidence index for June fell to 98.7 from 103.2 in May. A rating of 100 reflects the market of 1985. Its consumer expectation index, which is a measure of future near-term expectations on jobs growth and the economy, fell to an almost 10-year low of 66.4.
Another survey, conducted by the University of Michigan, shows consumer confidence slipping to 50 in June from 58.4 in May—the lowest reading on record since the beginning of the survey in 1952.
The grim outlook is driven by increasing inflation, in particular gas and food prices, putting a massive dent in consumers’ pocketbooks.
Early Indicators
Big U.S. retailers are already sounding the warning.But that strategy is backfiring as consumers are about to pull back. Inventories are building up at retailers. They expect more severe discounting going forward, eating into their profit margins.
Walmart—the nation’s biggest retailer—said in May during its first-quarter earnings call that it would need to work through its excess inventory “over the next couple of quarters.” Target stated that it will need to cut inventory by offering discounts and canceling open orders. Target also cited that it had excess inventory on home appliances, televisions, and apparel.
Official data from the U.S. Department of Commerce for May also suggests a pullback on consumer spending. Hurt by high gasoline prices, consumers had lowered spending in other areas, notably discretionary goods.
Amazon, the nation’s biggest online retailer, stated that it had overestimated its need for warehouse space. It announced a massive $3.8 billion loss in the first quarter of 2022, most of which was attributed to slack in its fulfillment network. In other words, it had to take some losses to cancel or delay new warehouse openings. Amazon CFO Brian Olsavsky told investors that the company had planned its warehouse footprint based on “the high end of a very volatile demand outlook.” In other words, it had expanded too quickly in some markets where it had overestimated consumer demand.
It also found itself overstaffed in some locations, after reporting last year that it was severely understaffed.
While this may seem overly prosaic for a large business operation, we should emphasize how abnormal this economic environment is. The nation’s economic fundamentals have shifted so much and so quickly that it has left many well-run businesses flat-footed.
The situation is similar—and potentially even more acute—on the ground. Talk to any owner of a small- to medium-sized business, and they'll cite the operating challenges in this environment. These challenges aren’t necessarily new, but the speed and velocity of the economic shifts make it hard to cope. Labor costs are sky-rocketing and supply chains are a mess, making inventory management an exercise in futility.
The interest rate environment has also been quick to shift. Many businesses are finding their floating-rate loans to suddenly be a lot more expensive. And if you’re an investor in retail company stocks, that’s potentially bad news.
If you’re a consumer, that’s a small bit of good news and a temporary reprieve from sky-high prices. The prices of some goods will be discounted in the next few months as retailers work through their excess supply.
If you’re an economist, this is potentially a sign that inflation could be approaching a plateau.
The economy, and by extension consumer demand, needs to weaken to a level lower than supply, naturally slowing down inflation. This will be closely watched by the Federal Reserve, and it will likely take a few quarters of sustained lower demand and job market weakness for the central bank to stop aggressively raising interest rates.
