29 July 2022
Inflation's rise is still at 40-year highs, the Fed's preferred rate says
Consumer spending slowed down in the second quarter, while sentiment is still at all-time lows.
Consumer spending slowed down in the second quarter, while sentiment is still at all-time lows.
On a busy week of economic data, here's a look at what we learned as the reporting cycle examining June drew to a close:
Friday's release of an inflation measure preferred by economic policymakers at the Federal Reserve showed the same result as the more widely-tracked Consumer Price Index for June: A new 40-year high.
The Personal Consumption Expenditures (PCE) price index increased 6.8% year-over-year in June, according to data released Friday by the US Commerce Department.
That’s above the 40-year-high of 6.3% set in March. Like the Consumer Price Index, the comparison point dates back to the midst of the country’s bout with inflation in the late 1970s and early 1980s. It's just shy of the 6.9% rate set in January 1982.
When factoring out typically-volatile food and energy prices, the inflation rate was 4.9% year-over-year, according to the Commerce Department.
When it comes to month-over-month comparisons, the change of 1% to the overall index was the highest since 1980. The 0.6% change in prices excluding food and energy was the highest since October 2001.
Price increases were present across categories, including food, furnishings and clothing and footwear.
A look at PCE data from June 2022. (Source: US Commerce Department)
Meanwhile, consumer spending also rose 1.1% in June when compared with May, with gasoline leading the increase.
Personal disposable income increased 0.7%, according to the Commerce Department’s data. However, the growth has been slowing in recent months, signaling that inflation is taking a toll on available discretionary funds.
The latest readings come just a couple of days after the Fed announced its second interest rate increase of 0.75% in as many months. In raising interest rates, the Federal Reserve is aiming to cool demand in the economy, and bring down inflation. The PCE is the rate used by the Fed to set its target of 2%. But in June, this gauge was trending away from that number.
The Federal Reserve seeks to balance price stability and a healthy labor market, so it also closely tracks wages and compensation to take into account the income that Americans have available to spend. Its preferred measure of this data, which is the US Labor Department’s Employment Cost Index, showed a 5.1% year-over-year increase in June. Wages and salaries also increased, up 5.3%.
Alongside low unemployment, the wage growth signals a strong job market. That has been cited as a good sign for the economy overall, and a key sign that the US may not be in a recession. But when it comes to the Fed’s action to cool the economy, continued rising wages alongside rising inflation can create a cycle that keeps pressure on prices to continue moving upward, as people seek higher compensation to pay for things that are getting more expensive. Adding to the complication, wages were not rising fast enough to keep pace with inflation in June.
While the total raise of 1.5% in a short period is rare for the central bank, the continuing rise of inflation will likely provide more evidence to back up the Fed’s decision. The Fed next meets in September, so a rate hike won’t come before then. While Chairman Jerome Powell said another “unusually large” rate increase may be on the table, he said Wednesday that the Federal Reserve is set to make decisions on further hikes based on the data it receives between meetings. Before it meets again, at least one more inflation and wage reading will be available.
A look at percentage changes in US GDP. (Source: US Commerce Department)
On Thursday, the latest data on overall US economic activity showed a slowdown for a second straight month.
The US gross domestic product (GDP) declined 0.9% in the second quarter. This followed a decrease of 1.6% in the first quarter, according to the US Commerce Department.
Two straight quarters of negative growth is typically believed to be the economic equation for a recession, but, as CNBC reported, a recession is only official when the National Bureau of Economic Research deems it as such months after the fact.
GDP is the broadest measure of economic activity, with many different factors taken into account from goods to services to government spending. Diving into an area of particular importance for consumer goods and retail, the Commerce Department said an increase in consumer spending for the quarter was driven primarily by services, including food services and accommodations as well as health care. This reflects a shift back to more spending experiences and in-person activities as pandemic restrictions were relaxed in early 2022. Spending on goods, which was far and away the primary focus of consumer dollars for the two years of the pandemic, decreased.
Overall, growth of consumer spending slowed down to 1% from a first quarter uptick of 1.8%.
Consumer sentiment continues to be at historic lows. The final reading from the University of Michigan Survey of Consumers for July showed “little change” from the lows in June that, like inflation, are at levels not seen since the 1980s. The one-year outlook fell to its lowest level since 2009, which was the beginning of the last recession.
“This month’s Sentiment Index was the second lowest reading on record, and the Q2 slowdown in personal consumption expenditures was no surprise,” wrote Surveys of Consumers Director Joanne Hsu.
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.