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Economy Grew 2.6%, But Warning Signs Are Everywhere

The U.S. economy expanded 2.6 percent in the third quarter, but there are already signs that a recession is lurking in the background as inflation continues to climb to a 40-year high.

The Conference Board’s Consumer Confidence Index reflected a decline in October to 102.5 from 107.8 in September after back-to-back gains. The Present Situation Index, the assessment of current business conditions, declined sharply to 138.9 from 150.2 last month. The Expectations Index, the short-term outlook six months out, slipped to 78.1 from 79.5.

“The Present Situation Index fell sharply, suggesting economic growth slowed to start Q4. Consumers’ expectations regarding the short-term outlook remained dismal,” Lynn Franco, The Conference Board’s senior director of economic indicators, said.

Franco noted that the Expectations Index is below a reading of 80, a level “associated with recession—suggesting recession risks appear to be rising.” Inflation concerns which have been receding since July picked up again, with gas and food prices serving as the main drivers, she added.

“Looking ahead, inflationary pressures will continue to pose strong headwinds to consumer confidence and spending, which could result in a challenging holiday season for retailers,” Franco said.

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For now, more consumers are whipping out their credit cards to make purchases amid rising inflation. The Federal Reserve Bank of New York said in an August report that U.S. household debt passed the $16 trillion mark in the second quarter of 2022, and was up 2 percent from the first quarter. Of that total, $890 billion is attributed to credit card balances. The report said consumers opened 233 million new credit card accounts in the second quarter, an increase from the first quarter and the highest seen since 2008. And while credit card delinquency rate remains at historic lows, they are rising among those in the sub-prime and low-income borrowers.

Zumiez CFO Chris Work confirmed the trend, saying the Gen Z mall chain has seen a noteworthy change in consumer payment habits and “pretty dramatic” increase in credit card spend.

When companies sense an economic slowdown, the first thing they often do to preserve cash is cut advertising and marketing programs.

On Tuesday, Google parent Alphabet Inc. might have signaled that a slowdown is spreading. July-September YouTube ad revenue fell 1.9 percent to $7.07 billion, the first time it has slowed since 2019. This could be perceived as a sign that advertisers are cutting costs as economic uncertainty rises. Google’s third-quarter ad sales rose just 2.5 percent to $54.48 billion, while revenue grew 6 percent to $69.09 billion and was the first time year-over-year quarterly revenue rose by less than 10 percent—it also represented the slowest revenue growth period in about a decade.

Amazon financial chief Brian Olsavsky said last week cited a “challenging” “macroeconomic environment” across the globe. Sagging sales growth will likely continue from the third into the fourth quarter and there are questions about how strong holiday will be, he added.

A Deloitte 2022 holiday study said inflation will likely curb holiday shopping habits. The consulting firm predicts that holiday spending will be flat year-over-year with an average $1,455 per household, but consumers are also planning to buy nine gifts versus 16 in 2021 for their intended recipients. And while consumers will likely pull back on no-gift purchases to focus on spending on experiences, Deloitte expects less travel than holidays past. Just 31 percent of U.S. consumers said they plan to travel between Thanksgiving and mid-January, down from 42 percent in 2021.

The Deloitte survey last month polled 4,986 consumers online between Sept. 6-14. The firm’s holiday retail survey polled 40 retail executives across categories between Sept. 1-13, with 93 percent of executive retail respondents having annual revenues of $1 billion or more. It found that 77 percent expect holiday sales to rise year-over-year.

Retailers also started their holiday promotions at least one to two weeks earlier than last year, even as consumers said they plan to spend less time shopping since they are buying fewer gifts. And amid higher prices and supply chain concerns, gift cards could become the go-to in 2022, with an average spend of $252 that’s up 7 percent from last year. If Deloitte’s right about the gift cards, that would not bode well for retailers as most cards are redeemed after the holiday rush when more items see additional discounting and ding retail margins. In addition, buying a gift card isn’t booked as a sale—that only happens when the holder actually uses the card to make a purchase.

Moreover, gifting resale items could be a key cost-saving strategy as consumers consider options that can help them increase their buying power. Thirty-two percent of shoppers plan to buy resale items, and nearly half of surveyed retail executives at 48 percent said they will sell refurbished or used products this season.

“Lower-income families feel more confident heading into the holidays, younger generations are embracing new retail formats, and retailers do not anticipate the issues with stockouts we saw last year,” Nick Handrinos, Deloitte’s vice chair and the U.S. retail, wholesale and distribution and consumer products team leader, said. “As consumers aim to be strategic about their purchases to outsmart inflation, retailers who can be flexible to meet consumers where they are will be more likely to build loyalty and profit from the holiday season and beyond.”