Dana M. Peterson, chief economist for The Conference Board, said the “risks are mostly tilted to the downside,” in a Friday webinar dissecting scenarios around an economic slowdown. High on the list is the escalation of war in Ukraine, other geopolitical events, and tensions between the U.S. and China, and even Greece and Turkey, heating up. Mistakes around monetary and fiscal policy where “central banks do too much too late, resulting in disastrous outcomes” also pose risks, she added.
Instead of a recession gripping the global economy, some countries such as the U.S., Germany and U.K. are likely to see growth stagnate, Peterson said, pointing out that Ukraine and Russia have already plunged into recessionary territory.
“And for China, we’re expecting very slow growth this year,” Peterson said, adding that slowdowns in Western economies are likely to be “brief and shallow.”
However, all bets could be off if “China, Europe and the U.S. all descend into a recession together,” Peterson warned, citing their combined “55 percent” of the global gross domestic product, give or take a percentage point.
Erik Lundh, chief U.S. economist for The Conference Board, said the Federal Reserve had been “rapidly front-loading interest rate increases to try to tackle inflation, but has a pretty tough time arresting it.”
So far, the Fed authorized a pair of 0.75 percent hikes in June and July, and is expected to hike rates up by at least 0.75 percent at Tuesday’s and Wednesday’s meetings.
And while Fed Chairman Jerome Powell said the U.S. central bank is committed to its 2 percent inflation target, Lundh doesn’t expect the central bank “to realize its inflation target even towards the end of next year.” That means businesses should expect the Fed to get the rate to around 4 percent early next year,” he added.
And while Lundh called the recent CPI reading “a bit of an anomaly” and “troublesome” to boot, he believes inflation will “gradually slow over the course of 2022 and into 2023.”
So, what does that mean for retailers?
Lundh expects inflation will remain a factor in consumer spending, despite the rapid growth in prices expected to retreat somewhat. While recent retail sales data and personal consumer expenditure, or PCE, metrics suggest a contraction is underway, Lundh said he’s “really concerned about the fourth quarter and the first quarter of next year.”
This could translate to a “brief and mild recession,” with economic expansion returning to the U.S. in “the tail half of 2023,” Lundh said.
What could go wrong? According to Lundh, the Fed could tighten more than expected. Other risk factors include the housing market in terms of a decline in prices, and government spending on infrastructure investments.
Meanwhile, in a Goldman Sachs webinar on the current state of logistics, transportation analyst Jordan Alliger said the economic slowdown FedEx mentioned has had a positive impact on port congestion.
“To start the year we had about 100 plus ships sitting off the coast of California. That’s worked its way all the way down to about 10,” he said, adding that as companies have diverted goods to other ports, “we now have about 100 ships sitting off the East Coast, waiting to unload, whereas it was probably 30 or 40 a few months ago.”
Alliger is concerned that warehouses are full to overflowing.
“Stuff is full. Warehouses are full and that’s still leading to equipment not turning around as quickly and containers stacking up at the point of final destination,” Alliger said. Until this problem is fixed, it’ll be nearly impossible to unclog the supply chain.
Goldman Sachs retail analyst Kate McShane said corporate downward revisions to earnings estimates are less about topline results and more about inflation. She cited “good” back-to-school trends while “Halloween has had a very good response and has been selling through at full price. It hasn’t had to be motivated by promotions.”
McShane expects that Target should be able to clear through its excess inventory but isn’t sure if mass merchants as a whole have sufficiently right-sized their holdings.
Retailers are hoping consumers will keep their shopping momentum going through the all-important holiday season. If that’s the case, then the inventories should be in “good shape by the end of the year,” she said. “But if you see a falloff in consumer demand, however, they will continue to [have] inventories to work through.”
The one thing that probably won’t be a concern are the shortages that left retailers with empty shelves during the past two holidays. But this year, virtually everyone has taken steps to get goods in with time to spare to be fully in stock. “So things that they would traditionally get for holiday, maybe in August or early September, they’ve had on their books now for a little while,” McShane said.