The end of the retail recession is good – or maybe bad

The year was complicated for macroeconomic analysis. Wild swings in inflation, energy prices, the stock market and consumer behavior have all led to mistakes on the part of businesses and investors. Retailers have been caught up in these changes, as evidenced by the mismanagement of consumer behavior by Walmart and Target that began in March. Stores had a lot of goods that consumers weren’t buying because they were shifting spending toward travel and leisure, or being squeezed by inflation.

Correcting these errors caused problems for retailers. But this week, Walmart and Target said in earnings calls that they are almost back to where they want to be. This is important because it means retail could once again become the engine of growth, putting pressure on the economy. And that raises the question of whether the economic weakness will last longer.

There are many ways to show how retail has slowed growth. Changes in private inventories reduced real GDP growth by 2% in the second quarter as businesses began to liquidate excess inventories. In 2021, retailers created 400,000 jobs by resuming post-pandemic job cuts, but since February this year they have cut 20,000 more.

This development has also had repercussions on the freight business. The trucking market fell this spring as retailers changed their behavior, and ocean freight rates fell as demand changed and the supply chain normalized.

When you’re in a store that’s getting very stocked, often just selling inventory isn’t enough – you’re also canceling orders, adding to the negative economic impact. Walmart said it set aside “billions of dollars to help align inventory levels with expected demand,” and Target said its second-quarter inventory actions included “more than $1.5 billion in our categories. discretionary”. including the removal of declining revenue.

But the problem with inventory cycles is that the changes, while sometimes abrupt, tend to be small. Addressing excess inventory, Walmart Chief Financial Officer John Rainey said: “At the end of the first quarter, we said it would take a few quarters to sort out. I will just repeat that it is true. Target, for its part, said it is more or less where it wants to be, which is why it anticipates a favorable profit margin for the rest of the year.

All of this should change the mentality of those who constantly focus on slow economic growth. Bloomberg News’ Joe Weisenthal noted this week that the economy was reeling from some retail shocks from last spring, with trucking company stock prices rebounding.

Walmart and Target returning to the expanded list in the next quarter or two could point to faster economic growth for the rest of this year. Business surveys may pick up new orders soon. Freights have been falling for months and commodity prices could rise further.

This will be mixed news for the Federal Reserve as it considers optimal monetary policy. On the one hand, it will show that the risks of recession are indeed very high, with retail being the first sector to complete its post-pandemic slowdown and return to growth. On the other hand, an acceleration in growth at a time when the Fed is looking to slow it could signal an alarming rise in inflation.

But it looks like we are entering the next few months. The retail crisis of the past five months is coming to an end, and now there will be a new phase of growth. The question is what this will mean for inflation, and in turn, how the Fed will handle it.


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