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With inflation high and talk of a recession in the air, economic data is being closely watched for signs of whether the US can avoid a big economic slowdown.
Here’s a look at fresh data released in the latter part of this week. Together, it provides a look a snapshot of where the consumer economy is right now:
Inflation’s rise is slowing, slightly.
First, the good news: The preferred inflation index of the Federal Reserve showed price pressure eased up in July.
The Personal Consumption Expenditures (PCE) price index showed an increase of 6.3% year-over-year for July, according to data released by the US Commerce Department on Friday. That was down from the 6.8% increase in June, which was a new 40-year-high. Prices for goods continue to rise, as they were up 9.5% for the month. Food prices, meanwhile, rose 11.9%.
On a month-over-month basis, this gauge showed a 0.1% decline – a welcome note of deflation after months of increases.
The core PCE price index, which excludes more volatile food and energy prices, registered a 4.6% year-over-year increase, down slightly from the 4.8% increase in June. On a month-over-month basis, this index increased 0.1% for the year, down from the 0.6% monthly comparison in June.
While there are signs that inflation is still going in the right direction, the big-picture conditions essentially remain the same: We are in a period of 40-year-high inflation, with the year-over-year PCE price index well above the Fed’s target of 2%.
Consumer spending changes, July 2022. (via US Commerce Department)
The Fed is forecasting pain ahead.
Shortly after the new data was released, Fed Chair Jerome Powell drove home the message that there’s a long way to go until the inflation is under control when he spoke at the central bank’s annual retreat in Jackson Hole, Wyoming.
“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said.
Powell said this will affect both overall economic activity and the labor market, which has continued to be tight even in the face of rising prices.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Without bringing prices down, Powell said that the economy is unable to have a longer period of good job conditions. He also offered a reminder that, “The burdens of high inflation fall heaviest on those who are least able to bear them.”
While the Fed delivered back-to-back rate hikes of 0.75% in June and July that are still setting in, more increases are likely to be on the way. Powell didn’t say anything definitive about the key bank committee’s next move when it meets again in September. However, he sent a strong signal that the hikes are likely to continue.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said. “The historical record cautions strongly against prematurely loosening policy.”
Offering his own takeaways from that history, Powell added that, “We must keep at it until the job is done.”
Consumer sentiment is starting to improve.
As prices start to fall and gas prices in particular drop, consumers are starting to feel a bit better.
Consumer sentiment ticked up in August, marking a 13% increase over July, according to the final reading of the month University of Michigan Survey of Consumers, In particular, people are getting more optimistic about what’s coming, as the year-ahead outlook rose 59% after two months at its lowest point since the 2008 recession.
“The gains in sentiment were seen across age, education, income, region, and political affiliation, and can be attributed to the recent deceleration in inflation,” wrote Surveys of Consumers Director Joanne Hsu. “Lower-income consumers, who have fewer resources to buffer against inflation, posted particularly large gains on all index components. Their sentiment now even exceeds that of higher-income consumers, when it typically lags higher-income sentiment by over 15 points.”
While Hsu hopes this improvement continues, it’s worth noting that sentiment is still historically low. The August consumer sentiment number rose on a month-over-month comparison, but it was a 17% year-over-year decrease.
While he wasn’t directly addressing this consumer sentiment data, Fed Chair Powell spoke about the role that public attitudes play when it comes to combating inflation. Getting prices under control is not only about data. When people think prices will remain high, they will adjust accordingly in their plans for spending and requests for wage increases. In turn, that is likely to keep driving prices up.
“Inflation has just about everyone's attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” he said.
Food inflation is still on the rise, even as gas prices fall.
Some of those expectations are set by forecasts, and the US Department of Agriculture delivered one such outlook this week.
The USDA offered data on the first half of the year and a projection on the second half iin a report on food inflation, which is a particular area of concern as gas prices begin to ease.
Retail food prices rose 8.9% in the first seven month of 2022. Compare that to the same period in 2021, when they rose 1.9%. The 20-year average through 2020, similarly, was 1.7%.
“Prices will continue to change during the remainder of 2022 and may significantly affect the annual inflation rate,” the USDA wrote, pointing to the fact that food price increases were sharper in the second half of 2021.
In all, the USDA projects that food prices will rise between 10 and 11 percent in 2022, which would well outpace the overall inflation rate.
Overall, private sector activity is showing signs of a slowdown.
As the watch is on for a recession, overall US businessactivity is showing continued signs of slowing.
S&P Global’s Flash Purchasing Managers’ Index (PMI) registered a 27-month low, as S&P senior economist Siân Jones warned of “disconcerting signs” for the economy.
“Demand conditions were dampened again, sparked by the impact of interest rate hikes and strong inflationary pressures on customer spending, which weighed on activity,” Jones said in a statement. “Gathering clouds spread across the private sector as services new orders returned to contractionary territory, mirroring the subdued demand conditions seen at their manufacturing counterparts.”
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.