Walmart sales climbed in the first quarter from a year ago, but flat transaction numbers suggest inflation drove the gain. Here, a Walmart in San Leandro, Calif., last year.
David Paul Morris/Bloomberg
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The latest retail sales report subverted recession fears. It shouldn’t.
When data showed that April sales for U.S. retailers rose 0.9% from a month earlier and 8.2% from a year earlier, Wall Street celebrated. Economists and strategists concluded that while consumers are miserable, they are still spending—and enough to prevent economic contraction as the Federal Reserve lifts interest rates and shrinks its balance sheet to combat high inflation. But that take, which fits with the prevailing narrative that the central bank will achieve a soft landing, is too cursory.
First, inflation-adjusted figures are called “real” for a reason. When you adjust the reported nominal sales numbers using the consumer price index, they were negative in April—and for the second straight month. The base effect is a factor, given the big jump a year ago that makes for a tough comparison. “But still,” says Lyn Alden, founder of Lyn Alden Investment Strategy, “a lot of these gains are just price spikes, not volumes.”
The problem extends beyond retail sales. Economists at
Goldman Sachs
say a “nominal bias,” or the effect of prices on survey index levels caused by respondents who think in nominal rather than real terms, means the pace of economic growth is about 2 percentage points below the 3.5% rate their unadjusted activity index implies.
Retailers’ earnings reports reflect the idea that consumers are paying more, not buying more. At
Home Depot
(ticker: HD), sales rose 3.8% in the first quarter as higher prices offset an 8% drop in transactions. At
Walmart
(WMT), the nation’s largest retailer, transactions were flat from a year ago, but higher prices pushed the average receipt up 3%. General merchandise sales fell because food inflation pulled more dollars away from other items. As David Rosenberg, chief economist at Rosenberg Research puts it, “Inflation is masking the ‘real’ data that is not as favorable as some believe.”
Second, consider the oft-cited statistic that underpins soft-landing predictions. Consumers are sitting on trillions in cash accumulated during the pandemic, many economists say. But what they don’t say is that inflation is eroding savings as inflation-adjusted incomes drop; the notion also brushes over pain across lower-income families, which have a higher propensity to spend, as the cost of essentials soar. “There is little to no ‘excess savings’ left in the economy, and the latest results from the nation’s largest retailer are evidence of this,” Rosenberg says.
That is not to mention the inventory upshot. The pace of inventory accumulation has exceeded sales in three of the past four months—welcome news on the supply-chain front but potentially ushering in a cycle of destocking and production cuts, says Rosenberg. That is as data from SpaceKnow, which monitors economic activity from space, show that the movement of goods from warehouses to retail centers and customer homes has slowed. Anu Murgai, the company’s vice president of commercial solutions, says logistics data specific to Walmart slowed first, with overall activity now catching up (or down). Two takeaways: Retail sales volumes are falling and inventories are rising, the latter potentially weighing on gross domestic product.
Third, consumer-credit data undermine the jubilant-consumer narrative. Consumer credit grew 39% in March from February, when it leapt from a month earlier, and it more than tripled from a year earlier even as the cost of credit rises. The good news, say Goldman Sachs economists, is that revolving credit balances—credit cards—remain below normal and household leverage doesn’t yet look problematic. The bad news: If revolving consumer credit continues to grow at its current pace, balances would fully normalize, and constrain spending, in the third quarter.
There is a silver lining in a consumer that isn’t as healthy as many believe. To some degree, higher prices might be starting to cure higher prices, upping the odds that the Fed won’t tighten as much as feared. Whether inflation cools enough to stave off stagflation and growth persists to prevent recession is another matter.
Write to Lisa Beilfuss at [email protected]
Source: https://www.barrons.com/articles/recession-inflation-consumers-51652969856?siteid=yhoof2&yptr=yahoo