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Inflation Fuels Consumers’ ‘Grimmer Outlook’ as Recession Looks Likely

Inflation in May rose 4.7 percent versus the year before, cooling off somewhat from previous months’ stronger surges, according to government data published Thursday.

With inflation taking its toll, consumer spending in clothing and footwear dipped a seasonally adjusted 0.68 percent to $496.7 billion in May after two consecutive monthly increases, the Bureau of Economic Analysis (BEA) revealed Thursday in its Personal Income & Outlays report.

Personal consumption expenditures (PCE) for furnishings and durable household equipment didn’t fare much better, inching up 0.08 percent to $484.61 billion, and essentially flat for three straight months.

The BEA data reflected the U.S. Census Bureau’s retail sales report for May, which saw clothing and clothing accessory stores tick up 0.1 percent month over month and furniture and home furnishings store sales fall 0.9 percent from April.

“There’s been little relief from inflation and we expected some cooling off in sales in reaction to prices, National Retail Federation chief economist Jack Kleinhenz said. “There have been swings across sectors that reflect the impact of both higher prices and supply chain disturbances, and higher interest rates are expected to curb spending going forward. As inflation continues, consumers are looking for ways to stretch their dollars by saving less, tapping into savings accumulated during the pandemic and increasing their use of credit.”

Sara Johnson, executive director for economic research at S&P Global Market Intelligence, said in a report that with inflation at a fever pitch, central banks around the world are raising interest rates with new urgency, hoping to cool inflation by slowing growth of aggregate demand and achieving a closer balance with supply.

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“With high inflation shattering consumer and investor confidence, forecast probabilities are leaning closer to recession–in Europe and North America, prospects for a “soft landing” are dimming,” Johnson said. “Our June forecast calls for global consumer price inflation to ease from 7 percent in 2022 to 4 percent in 2023 and 2.7 percent in 2024. This deceleration in prices reflects a gradual resolution of supply chain disruptions along with softening demand. Industrial and agricultural commodity prices are expected to retreat from recent peaks over the next two years, although most prices will remain significantly above 2019 pre-pandemic levels.”

Overall PCE increased 0.2 percent, or $32.7 billion, for the month, reflecting an increase of $76.2 billion in spending for services that was partly offset by a decrease of $43.5 billion in spending for goods. Within goods, a decrease in spending on motor vehicles and parts was partly offset by an increase in gasoline and other energy goods, led by motor vehicle fuels.

Real PCE, adjusted for inflation, decreased 0.4 percent as goods declined 1.6 percent and services increased 0.3 percent.

The PCE price index was up 0.6 percent–excluding food and energy, the core PCE price index increased 0.3 percent. The PCE price index for May increased 6.3 percent from a year ago, with goods and services prices both up. Energy prices rose 35.8 percent, while food prices increased 11 percent.

The May core PCE Index, excluding food and energy, increased 4.7 percent year over year.

BEA reported that personal income increased 0.5 percent, or $113.4 billion, in May, according to BEA, while disposable personal income (DPI), a key barometer of retail spending, increased 0.5 percent, or $96.5 billion.

The increase in personal income in May was primarily attributed to increases in compensation and proprietors’’ income that were partly offset by a decrease in government social benefits.

Personal outlays increased $38.3 billion in May. Personal saving was $1.01 trillion and the personal saving rate–personal saving as a percentage of DPI–was 5.4 percent.

Consumer cutbacks on spending

Economists expected consumers to spend more on travel and experiences versus goods like clothing but inflation could be changing that equation.

Wells Fargo economists Tim Quinlan and Shannon Seery are “are increasingly concerned that a contraction in consumer spending is inevitable this autumn,” they wrote in a report Tuesday.

“The labor market is still historically strong but after a few years in which it has been a seller’s market for labor, there are incipient signs that the momentum has not only stalled but is now starting to move in the other direction,” they added.

A national consumer inflation survey from Provident Bank found that 83 percent of consumers are cutting back as they adjust their personal spending and travel habits due to inflation.

Results show that 10.5 percent said they’ve eliminated all non-essential purchases, and 71.7 percent said they’ve made some changes to their personal travel habits. Consumers also cited gasoline, groceries and clothing as the three regularly purchased products or services where price increases have hurt them the most, the survey found.

With the price of gasoline average $4.857 a gallon nationwide, according to AAA’s Thursday data, consumers said they’ve canceled vacations and leisure travel. Thirty-two percent of drivers spend between $101 to $250 more per month on gasoline, with 13.5 percent reporting a monthly increase in fuel costs at between $251 and $500.

In addition, 48.4 percent of respondents said they have been substituting some items for less expensive alternatives. Tactics include buying only what’s needed and shopping at discount stores. For apparel, many said they were either cutting back on these purchases or have stopped buying anything new. One respondent said they’re buying clothes at secondhand stores, and another wrote, “I don’t buy clothes or shoes when I want to.”

Survey takers addressing inflation blamed rising costs on supply chain shortages (24.88 percent), Covid (26.63 percent) and the Russia’s war in Ukraine (26.47).

Consumer Confidence

Inflation is also causing consumer confidence to wane.

The Conference Board’s Consumer Confidence Index fell to 98.7 in June from 103.2 last month and was a drop from 128.9 a year ago. The decline represents the lowest level for the Index since February 2021, when it stood at 95.2.

Both components of the index declined this month. The present situation portion slipped to 147.1 from 147.4. The expectations module decreased sharply to 66.4 from 73.7, hitting its lowest level since March 2013 when it was at 63.7.

Consumers were also more pessimistic about their short-term financial prospects. Just 15.9 percent expect their incomes to rise, down from 17.9 percent. And 15.2 percent expect their incomes will decrease, up from 14.5 percent.

Looking ahead over the next six months, only 14.7 respondents expect business conditions will improve, down from 16.4 percent last month. And 29.5 percent expect business conditions to worsen, up from 26.4 percent. Another 22.0 percent said they expect to see fewer jobs available, up from 19.5 percent last month. And only 16.3 percent expect more jobs, down from 17.9 percent.

“Consumer confidence fell for a second consecutive month in June,” Lynn Franco, senior director of economic indicators at The Conference Board, said, adding that consumers’ “grimmer outlook” and “downward trajectory” over the near-term  was “driven by increasing concerns about inflation.”

“Expectations have now fallen well below a reading of 80, suggesting weaker growth in the second half of 2022 as well as growing risk of recession by year end,” she said.

Supply chain struggles

Meanwhile, as consumers struggle to adapt to rising prices, retail’s having its own problems with a broken supply chain making it hard to stay in stock.

Eighty percent of retailers have been hit by supply chain problems in the last year, with 52 percent of shops and e-commerce brands losing sales due to stockouts, according to a Brightpearl survey of 500 U.S. retailers. In addition, retail costs have risen 23 percent, and 51 percent forced to raise prices. Sixty-seven percent cited product shortages as their biggest supply chain problem. This erodes brand loyalty as 32 percent of shoppers bought from a different brand when they couldn’t find what they were looking for.

The survey found that nearly one-third of respondents, at 31 percent, are in danger of running out of cash within eight weeks if sales don’t improve.

“Supply chain struggles are the number one threat to American brands in 2022, with 32 percent of merchants citing it as the biggest threat to their viability,” Brightpearl said.

“We are in the worst supply chain crisis that any of us can remember and there is no sign of the problems easing before the end of the year,” Brightpearl CEO Derek O’Carroll said. “For retailers, the problems could be particularly severe as they prepare for autumn and peak trading in the months building up to the holiday season.”