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In July, private sector firms in the US recorded their first dip in activity since June 2020, according to the latest “flash” PMI data from S&P Global.
The PMI’s composite index was 47.5 in July, down notably from 52.3 in June. The decline was seen across the service and manufacturing sectors, though it was services that accounted for most of the drop.
That rate of decline hasn’t been seen since the early stages of the COVID-19 pandemic, S&P Global said.
\u201cThe US #economy is contracting at rate not seen since the global financial crisis in 2009 (excluding the initial pandemic lockdown), as the flash #PMI covering output of manufacturing and services fell sharply in July.\u201d— Chris Williamson (@Chris Williamson) 1658497963
The PMI, short for the Purchasing Managers’ Index, is a measure of business activity, serving as one indicator of the economy’s health. It is used by central banks to make decisions, and can also provide a snapshot of the overall state of activity between businesses as they serve each other, and provide the goods that make their way to consumers.The index is compiled through a survey of around 800 companies in the US manufacturing and service sectors. S&P Global provides an initial “flash” reading that accounts for about 85% of the survey responses. A final reading will be available August 1.
Reporting the results of the survey, S&P Global made the following observations:
- New orders: There was pressure on demand arising from inflation and COVID-19. Services companies had a “marginal” increase in new business, while businesses fell for manufacturers.
- Input costs such as fuel transportation are also rising. However, the pace of inflation on these costs slowed from a peak in May.
- Selling prices are higher, as firms pass those higher input costs onto consumers.
- Staffing numbers showed the weakest increase since February, though the services sector had a strong increase in hiring.
- Business confidence is at its lowest since September 2020.
In commentary, S&P Global raised the specter of the American economy’s two toughest moments of the last 20 years: The 2009 recession and the 2020 pandemic shock as comparison points for the current environment.
The preliminary data points toward a "worrying deterioration in the economy," said Chris Williamson, chief business economist at S&P Global Market Intelligence, in comments provided by PMI. Manufacturing has "stalled" and a rebound in activity in the service sector from the pandemic is now heading in the other direction, Williamson said. "Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis, with the survey data indicative of GDP falling at an annualised rate of approximately 1%. Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest," Williamson said.
“An increased rate of order book deterioration, with backlogs of work dropping sharply in July, reflects an excess of operating capacity relative to demand growth and points to output across both manufacturing and services being cut back further in coming months unless demand revives," Williamson said. "However, with companies’ expectations of future growth slumping to the lowest since the early days of the pandemic, any such revival is not being anticipated. Instead, firms are already reassessing their production and workforce needs, resulting in slower employment growth."
However, Williamson did note that a “weakening demand environment” was bringing price easing, with the rate of inflation down to a 16-month low. This could offer one sign that the Federal Reserve’s action to raise interest rates are having the desired effect of cooling off the economy. However, it remains to be seen whether those moves end up causing damage in other areas such as jobs and activity. The Federal Reserve is set to announce its July decision on whether to once again raise interest rates on Wednesday, July 27.
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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.