1. Trends & External Forces

The Elusive Recession, & Not-So-Elusive Recessionary Mindset

The Wall Street Journal this morning writes that “more than a year after the Federal Reserve began rapidly raising interest rates to tame inflation, the hallmarks of a widely expected recession remain elusive.

“Employers are hiring aggressively, consumers are spending freely, the stock market is rebounding and the housing market appears to be stabilizing—the most recent evidence that the Fed’s efforts have yet to significantly weaken the economy. 

“Instead, the lingering effects of the pandemic have left consumers and employers still playing catch-up. That momentum could prove self-sustaining.

Americans are splurging on the activities they skipped during pandemic lockdowns, such as travel, concerts and dining out. Businesses are staffing up to satisfy the pent-up demand. Government policies in response to the pandemic – low interest rates and trillions of dollars in financial assistance – left consumers and businesses with lots of money and cheap debt. The same inflation that so worries the Fed translates into higher wages and profits, fueling spending.”

The Journal writes that “the job market could stay tight, largely because millions of former workers near retirement age have dropped out of the labor force since the pandemic began. The share of Americans age 16 and older working or seeking a job held steady last month at 62.6%.

“Americans have about $500 billion in so-called excess savings—the amount above what would be expected had prepandemic trends persisted, according to a May report from the Federal Reserve Bank of San Francisco.  That allows them to shell out for summer travel, concert tickets and cruises despite rising prices—and enabling companies to keep raising them.”

An indication of how the economy is doing came last Friday, when, as the Washington Post reported, “employers posted a blockbuster 339,000 jobs in May in the latest sign that a booming labor market continues to keep the country from slipping into a recession, but the economy also gave new warning signs with an increase in the unemployment rate.

“The unemployment rate rose in May to 3.7 percent from 3.4 percent, one of the fastest increases since early in the pandemic, according to Bureau of Labor Statistics data released Friday. About 440,000 more workers reported that they are unemployed — and most of those were from temporary jobs ending or layoffs, according to the data. Some of that increase could be driven by layoffs in the tech sector that have hit 200,000 workers this year.”

KC’s View:

I’m no economist, but it seems evident that there is a big difference between inflation and recession – they may be connected, but the first doesn’t necessarily make the second inevitable.  And, if there is a recession, it seems increasingly likely that there will be a soft landing and not a crash that will devastate the economy.

That said, inflation – as well as a lot of media attention and political focus on the possibility of recession – has created a recessionary mindset.  Which, if you are a retailer, can be as problematic.  Though not as worrying as the specter of deep recession and an economic crash.

GOBankingRate.com reports that “Costco Chief Financial Officer Richard Galanti said he’s seen some customers switching from purchases of beef products to less expensive choices, like pork and chicken. He said he’s also seen this trend historically as the U.S. entered a recession in the past.

“He added that some customers are purchasing canned meat and fish products, which cost less and also have a longer shelf life. In a situation of hyperinflation — or in the case of job loss sparked by a recession — consumers who stock up on non-perishable items will be able to stretch their savings and unemployment income further if they already have a well-stocked pantry.

“A newly released report from the United States Federal Reserve found that 64% of Americans have switched to cheaper versions of products to make ends meet amid inflation. Meanwhile, 66% of those polled (respondents could choose more than one option) said they are using less of specific products or eliminating them entirely. That report tracks with Costco’s data in a few ways, showing Americans choosing less pricey products across the board.

“Galanti also noted that sales of Costco’s private label brand, which sell for less than national brands, had risen in the last quarter.”

All of which may reflect a current recessionary mindset, as opposed to an actual recession.  Though it may not matter.

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