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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 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.
...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.
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.
Trending in Economy
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, 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.