You can’t do just one thing. You can’t have crippling inflation, expect it to have no effect on the economy, expect consumers to keep consuming as they had been, and expect businesses to keep rolling in profits. Now it shows.
People spend more when they have more money and access to credit. People save more when money is tight or they worry about the future. What makes people worry? Nothing complicated to figure that out. People are now worried about the future—their jobs, their debts, and their incomes.
The Conference Board reported that because of worries about inflation and rising interest rates consumer confidence sits at a 1 ½ year low and has eroded to the lowest since February 2021, the third straight month of decline. That points, they fear, to slower economic growth starting in the third quarter of this year, growth that has slowed ahead of the third quarter with the .9 percent decline in the Gross National Product for the second quarter in addition to the 1.6 percent decline in the first quarter.
The survey reported that consumers are “sharply reassessing their spending plans now.” Buy refrigerators and washing machines, forget about that in the next six months of so. They also have forgotten about buying a new home as new home sales fell to their “lowest level in just over two years in June,” reports Reuters. And buying a new car? “Cox Automotive estimates that U.S. car sales came out to 1.2 million units, which is 7.5% lower than a year ago,” reported Consumeraffairs.com on July 5.
Even more telling might be the Expectations Index. That’s based on “consumers’ short-term outlook for income, business, and market conditions,” at 65.3, the lowest since March 2013. “The persistent reading below 80 keeps a recession in play,” reported Reuters on July 26.
In general, with money tight, economists say people fall back to what they know, comfortable brands and products while they spend more at home including remodeling. But that’s generally. Now it’s worse. We’re beyond what’s comfortable and known. People are cutting back to essentials. They either can’t spend, except of essentials, or save because inflation has eaten up their buying power.
TVs, clothes, and appliances languish on the shelves, calling to consumers to stop on the way to the grocery section, but looked at by consumers as unaffordable luxuries. Walmart reported on July 25 that people are shying away from general merchandise because they can barely afford food. And food is what they’re buying, even if they have to pay for it by going into more credit card debt.
Meanwhile Walmart expects adjusted earnings per share for the second quarter to decline about 8 percent to 9 percent and for the year 11 percent to 13 percent. That’s after expecting them “to be flat to slightly up for the second quarter and to drop by about 1 percent for the full year,” reported CNBC on July 25.
CNBC also reported that Target, experienced similar issues. “Last month . . .said its profit margins would take a hit as it canceled orders and marked down merchandise.”
Sure, retail sales jumped one percent in June, but that figure doesn’t adjust for inflation which ate up most of the increase in sales figures. Adjusted for inflation, they decreased .5 percent. Hourly earnings rose nine-plus percent in the last two years but got made moot with the 15 percent increase in prices over the same time period.
Combine all that with the fact that people are using their credit cards to pay for food and other necessities, running up debt that they may have trouble paying off. If they lose their jobs, paying off the debt will be especially problematic.
With people forgetting about dining out and forgoing buying building supplies, clothing, general merchandise, and health and personal care products, company profits suffer. When company profits take a hit, layoffs begin. The first business failures come from small businesses, which, when sales dry up, have to either lay off the few employees they have or close up shop completely, cutting the jobs of the employees and the owners. Large companies are better able to withstand economic downturns, especially if they can diversify or pivot into producing essential products such as food and transportation, but not being immune, the layoffs take longer.
But, not so fast, the big business problems have already begun. For example, Bloomberg News reported on July 22 that “Ford is planning to cut 8,000 positions in the coming weeks. Electric car maker Rivan is cutting 700 jobs, delivery startup Gopuff is laying off 1500 and Loan Depot is cutting 4800 jobs this year,” all large companies that produce non-essentials, which consumers can forget about buying right now.
Meanwhile, the Washington Post reported, citing a ZipRecruiter report, that “The number of active job postings across multiple online platforms has declined for five straight weeks.” Tech hiring fell 9.1 percent in June compared with a 5.4 percent decline in hiring across all industries, reported LinkedIn. In addition, first-time unemployment filings rose 7,000 the week of July 11 “and are up 51 percent from mid-March” despite remaining at near historic lows.
Sure employment is better than it’s been for three years or so, but with the economy on edge and teetering dangerously toward recession, the hope for continued “good times” gets hammered by declining consumer confidence. Perception is everything. What people perceive drives them, and now they perceive that the economy is in trouble and they had better hunker down as best they can.
Despite all the troubling figures, Treasury Secretary Janet Yellen takes her rose-colored glasses out of their case, puts them on her nose, and states in a news conference, “This report indicates an economy that is transitioning to more steady sustainable growth.” You have to wonder what she means by “sustainable.”
