30 June 2022
Reminder: Supply issues are still driving inflation
It's "highly uncertain" when they will resolve, a Fed analysis states.
It's "highly uncertain" when they will resolve, a Fed analysis states.
At a time of economic swings, everyone watches for signs of how the causes are playing out on the ground, and when things might get better. Inevitably, this leads back to a close monitoring of the two forces shaping the economy: supply and demand.
That has been true in the shifts of the last two years.
In 2021, supply was in focus, as bottlenecks in the supply chain made goods tougher to get. Delayed shipments and out-of-stock notifications were the signs of this shock.
As inflation increased in the spring of 2022, demand took center stage. Consumer behavior is being closely watched for signs that spending habits are changing as prices go up. In fact, retailers are now dealing with too much inventory, which could perhaps be taken as a sign that demand has overtaken supply as the focal point. The issues are not so much making and acquiring goods as moving them.
The two appear to swing back and forth.
Determining what caused the period of 40-year-high inflation that the economy faces right now could help find a way out, so the question becomes, was it supply or demand?
It turns out that the answer is both, and supply played a larger role. That's according to a recently-published Economic Letter from Federal Reserve Bank of San Francisco Senior VP of Economic Research Adam Hale Shapiro.
The analysis shows that supply factors account for about half of the rise of current inflation levels, while demand accounts for about one-third of the run-up. The rest is attributable to “ambiguous factors,” Shapiro writes.
This balance is even more apparent when it comes to so-called “core inflation,” which factors out food and energy to focus on consumer goods. Shapiro found that supply and demand each contributed to about half of rising inflation across these categories.
(Graph via Federal Reserve Bank of San Francisco)
For those watching demand, the letter offers a reminder: supply issues remain an overriding concern in this economy. They’ve been with us since at least April 2021 and haven’t slowed since. Labor shortages, pandemic-related supply chain disruptions around the world that are only starting to heal and the war in Ukraine are all feeding inflation from this side.
As a result, supply-related issues are likely to play a major role in determining when inflation will start to ease. It also makes that timeline tough to predict right now.
“The large impact of supply factors implies that inflationary pressures will not completely subside until labor shortages, production constraints, and shipping delays are resolved,” Shapiro writes. “Although supply disruptions are widely expected to ease this year, this outcome is highly uncertain.”
To be sure, demand still has a big role and should be watched closely. Shapiro points out that categories like furniture, clothing, toys and cookware showed “extraordinarily frequent” demand-driven price changes during the last two years. Inventory and other demand-related issues are still a big concern to retailers and those selling consumer goods, especially as a swing back towards spending on services and experiences reshapes consumer behavior.
It's just that the supply side is an important predictor of where we’re heading. It is of particular concern for policymakers at the Federal Reserve. Shapiro points to recent remarks from Fed Chair Jerome Powell during an interview with NPR’s Marketplace:
“What [the Fed] can control is demand, we can’t really affect supply with our policies…so the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control,” Powell said.
In other words, the 30-year-high interest rate hikes that the Fed is implementing are designed to cool demand. But its available tools may not be addressing the determinant of whether the economy ends up in a recession.The Fed will continue to monitor supply and demand together, and share results at here.
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Macy’s CEO Jeff Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.