Mixed signals on recession put 'consumer stamina' in focus

August job gains show the labor market remains strong, but is the economy still too hot?

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Photo by Tim Gouw on Unsplash

Is the US in a recession?

It’s the question economists are pondering and many in retail and ecommerce are fretting. The economy is showing signs of slowing growth, and the Federal Reserve is forecasting "some pain" ahead as it seeks to bring down inflation.

Still, signals in the current moment remain decidedly mixed. The latest example came on Friday, when the US Labor Department shared in the monthly jobs report that unemployment was 3.7%, and the economy added 305,000 new jobs. At the same time, the labor force participation rate ticked up to its highest since 2020. That was roughly in line with Wall Street estimates. Still, the takeaway wasn’t clear.

On one hand, it showed the economy was still running hot overall in the immediate wake of back-to-back rate increases from the Federal Reserve. The positions added were not as many as the 526,000 added in July, but the labor market remains strong. The signs of health led some analysts to declare that there was still hope of a so-called “soft landing,” where the Fed brought down inflation but did not lead the US into a recession in doing so.

On the other hand, a hot economy is exactly what the Fed doesn’t want to see. As central bankers seek to fight inflation, they want their monetary policy tools to cool off the economy. The overall picture is still one of elevated inflation and a strong job market. If signs of some softening are not showing up, the Fed could continue to raise rates, which raises the likelihood of "pain." After all, Powell said only seven days ago that the pain was still to come, and that the interest rate hikes will take a while to start having an effect.

Just because it's not happening now doesn't mean it won't happen later. Speaking at the National Association of Chain Drug Stores Total Store Expo last weekend in Boston, former US Treasury Secretary Larry Summers offered the view that a recession isn't happening now or in the near future, but rather it is likely to arrive sometime in the next two years.

So we will keep watching the data. Recessions are often judged on whether the overall economy is growing or not, but there’s also a difference in what the key measures of this show.. As National Retail Federation Chief Economist Jack Kleinhenz pointed out this week in the trade group’s Monthly Economic Review, gross domestic product shrank 0.6% year-over-year in the second quarter, following a 1.6% drop in the first quarter. Two straight quarters are viewed by some as indicating a recession, but the declaration is only made months after one sets in. Meanwhile, gross domestic income, which measures what is earned from the production measured in GDP, grew 1.4% year-over-year in the second quarter following 1.8% growth in the first quarter. At the same time, consumption spending for the second quarter was revised up to 1.5% year-over-year growth in the second quarter. There are no signs of slowing there. It is leaving economists befuddled.

“Since there is a large difference between estimates of GDP and GDI, did the economy expand in the first half of 2022 or did it contract?” Kleinhenz wrote. “That is difficult to determine, but we will likely have a better idea at the end of September.”

Similar to the growth vs. contraction question, recession and soft landing are seen as a binary choice. But a third concept entered the realm this week, and it is now potentially seen as the favored approach of the Federal Reserve: The growth recession. Bloomberg describes it this way:

Unlike a soft landing, it’s a protracted period of meager growth and rising unemployment. But it stops short of an outright contraction of the economy.

...The late New York University economist Solomon Fabricant coined the term “growth recession” in research published in 1972. While such a scenario may not be as costly as an actual contraction, it poses dangers for the economy nonetheless, he suggested at the time.

A tiger contained “is not the same as a tiger loose in the streets, but neither is it a paper tiger,” he wrote.
The fact that this multitude of explanations exists underscores the uncertainty surrounding the economy coming out of two years of turbulent economic swings during the pandemic, geopolitical turmoil in China and Russia, and months of 40-year-high inflation that has resulted from the mismatch of supply and demand they created.

What’s more certain is that inflation is putting pressure on retailers and consumers alike. Brands and retailers are facing increased costs, and raising prices as a result. Consumers have been paying more on gas and food, and are likely looking for savings in other areas. On a month-over-month basis, US retail sales were flat in July when compared to June. In June, those sales grew 0.8% over May. While those sales aren't adjusted for inflation, they are among the key data that is watched.

“All eyes remain on the consumer and what is happening in retail is very important,” Kleinhenz wrote. “While consumers have become more cautious and cooled their spending in the first half of 2022, households continue to spend and are contending with inflation by using credit cards more, saving less and drawing on savings built up during the pandemic. Consumer stamina will be the big question going forward.”

Signs are already emerging that consumers are turning to credit to combat inflation. In a report on household debt for the second quarter, the New York Fed reported that credit card balances were at their highest levels in 20 years. From the New York Fed's blog post:

The $46 billion increase in credit card balances this quarter was among the largest seen in our data since 1999, at least partly reflecting inflation on consumer goods and services purchased using credit cards. Americans are borrowing more, but a big part of the increased borrowing is attributable to higher prices.

We know that prices have been inflated. It remains to be seen whether spending has been propped up in its own right by stimulus, credit and savings accumulated at a time when money was much cheaper and easier to come by. Add into the mix that retail sales are not adjusted for inflation, and this picture becomes even less clear, as well.

Another big question is what consumers see in the economy. On that front, the College Board reported this week that consumer confidence rose in August after three straight months of declines, reaching its highest level since May.

"Concerns about inflation continued their retreat but remained elevated," said Lynn Franco, senior director of economic indicators at The Conference Board, in a statement. "Meanwhile, purchasing intentions increased after a July pullback, and vacation intentions reached an 8-month high. Looking ahead, August's improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term."

It's a relatively welcome sign, and may be a point for the crowd that thinks a soft landing is still possible. If shoppers think that a recession as taking hold, they typically adjust accordingly. This mindset is just as important as the dollars spent.

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