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Staring at an Economic Precipice? Just Wait, It Gets Worse

We’re in an awful cycle of bad economic news.

The stock market is crumbling, inflation is rampant, and shortages continue to plague supply chains, all with the backdrop of Covid-lockdowns and the war in Ukraine. It’s a terrible feedback loop. Yes, the psychology of the market is crummy, but so are the realities of the economy on the ground.

The bottom line for our industry is simple: will consumers continue to buy apparel? The honest answer in my opinion: for a time, they will, but it’s hard to see it lasting much longer. I might need new eyeglasses, as it’s hard to see everything, but I’m not alone, as industry leaders, policymakers in Washington, and economists everywhere seem to have poor eyesight these days. There’s a sense of panic in the air.

You’ve read the headlines. Our industry is in for a rough ride. A lousy economy tanks retail, snarls supply chains, and dampens demand for our products while causing panic, uncertainty, and heightened risks in the market. Consumers get spooked. It stirs the politicians. And it leaves economists saying, “no wonder they call economics the dismal science.”

Markets move on psychology as well as hard evidence. So, let’s start with psychology and work through the statistics. Market psychology stinks. Everyone seems to expect a recession is just around the corner. The Federal Reserve (the “Fed”) will crank interest rates up too fast and crash the economy. Demand will plummet—and then we have a fall-off-a-cliff scenario.

And to be frank, it’s hard to dismiss that assessment. Indeed, after reading the most recent inflation statics (released on June 10, with top-line inflation up 8.6 percent), it’s easy to imagine the Fed steeply raising interest rates to control inflation as soon as possible (it raised rates 0.75 percent Wednesday). Inflation needs to come down, or its insidious nature will undermine any wage gains enjoyed by workers, and an abrupt halt in consumer purchasing seems a forgone conclusion. But move too fast to control inflation and the economy will crash under its own weight.

At a minimum, unchecked inflation will hit the bottom lines of major brands and retailers. Global trade, already disrupted by the pandemic and the war in Ukraine, will only become more tenuous. Yet, international commerce may take it in the neck regardless of what the Fed does.

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Let me explain. When the Fed raises interest rates to control inflation, it increases the value of the U.S. dollar compared to foreign currencies. Why? The short answer is investors everywhere will put their financial investments into dollar-denominated ones. A strong dollar translates to better returns.

However, international trade will be affected at the same time. If you import, the cost of your goods will go down over time, assuming the price of your products is in U.S. dollars, while exports from the U.S. to other countries will become more expensive. If we add in port delays, overseas inflation, and unforeseen raw material price hikes or shortages, we’re staring at a feedback loop that transcends simple psychology. We have severe economic events to be concerned about.

So the economy is losing steam. Inflation is rising. Product shortages are evident throughout the supply chain, with many essential products hard to obtain, no matter the price. It is a mess. But don’t take my word for it. Check this out:

“Our forecasts reflect a sizable downgrade to the outlook: global growth is expected to slow sharply from 5.7 percent in 2021 to 2.9 percent this year. This also reflects a nearly one-third cut to our January 2022 forecast for this year of 4.1 percent. The surge in energy and food prices, along with the supply and trade disruptions triggered by the war in Ukraine and the necessary interest rate normalization now underway, account for most of the downgrade.” That’s World Bank Group president David Malpass in his “Global Economic Prospects” from June.

See, it’s not just me. And while you may think I’m too pessimistic, despite my best efforts to keep my chin up, the trends weigh me down.

If you don’t read anything else in this article, then focus on the checklist above. It’s all you need to know as the world faces some of the stiffest economic headwinds in years. And our industry will face challenges in ways not seen since the global financial crash in 2008.

The world’s in a tough place right now. To deny that is to ignore reality. Even though some may favor alternative narratives, it’s hard to ignore what’s affecting people the most these days: inflation and supply chain snafus. We can thank the pandemic and Russia’s invasion of Ukraine for both. Some may blame government policies, too, but the ripple effects, at least from an economic perspective, are significant and will be around for a while.

“The U.S. economy will tip into a recession next year, according to nearly 70 percent of leading academic economists,” the Financial Times reported on June 13. The sentiment of economists about 2023 reflects the belief that the Fed will move too aggressively to control inflation and upset the economic applecart simultaneously. More pointedly, should this sentiment prove accurate, our industry will suffer as demand for new clothes could get hammered in a duck-and-cover moment for the trade.

Even so, I’d like to suggest that although the short-term situation appears to be deteriorating, it’s just a return to historical norms, particularly trends that predated the pandemic. Hence, the news is bittersweet when considering the bump from government stimulus during the pandemic. Demand soared, leaving global supply chains in knots and supply and demand unbalanced. Just-in-time delivery turned into crash-and-burn agony. And then we had the war. It’s not a great series of events. The ride back from the pandemic-induced abyss in 2020 is harrowing.

Yet import prices, despite a stronger dollar, will likely encourage the production of cheaper products over the long run. The psychology of consumers will be to buy the most affordable products possible. So, what will that do for sustainability and higher-priced clothing? Not a lot. Cheap may win out in the end. Despite the efforts of so many people, more sustainable production in the industry may prove to be a luxury many brands (and consumers) can’t afford.