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MON, MAY 15, 2023

Are We Heading for a Recession?

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I wrote this piece almost exactly a year ago, but the ideas still resonate as we look ahead to earnings from big retailers this week. So in this On the Other Hand archive read, revisit last year’s arguments about whether we’re headed for a recession or not. (For the record, the first argument won; low unemployment and peaking inflation allowed consumers to keep spending through the end of 2022 and into Q1, and we were not determined to be in a recession.)

From 5/19/2022: Earnings from Target, Walmart and other retailers are showing that consumers might be more hesitant to buy goods, as prices soar. Does this mean we’re headed for a recession? Jon Fortt is here to weigh in.

JON:

“No, we’re not heading for a recession.

First, let’s define a recession as at least two consecutive quarters of a shrinking economy, negative GDP growth. How does that happen? Consumers and businesses spending less. And despite a nasty inflation picture, that’s not what we see happening.

Walmart’s sales weren’t down — they were actually strong, as consumers headed there for low prices. Target’s sales numbers were good too, it’s just that profits suffered from fuel, labor and inventory costs. Lowe’s and Home Depot said DIY project spending is going strong, and Lowe’s only missed revenue because the coldest April in more than 20 years delayed spring shopping.

I know it’s tempting to swing from market euphoria six months ago to market apocalypse now, but both are wrong-headed. So let’s take a step back and be level-headed: Stocks are rationalizing, yes. Inflation is high. But there are plenty of things going right in the economy.

Unemployment is low. Inflation may have peaked. With the pandemic easing, people are returning to normal spending patterns and shifting the balance away from goods and back toward services.

What’s important is that consumers are still spending. That gives the Fed room to engineer a softer landing as rates come up. It’s going to be a tough economy, but not a shrinking one.”

OK, but these results are from the first quarter, before rate hikes really started.

JON:

“On the other hand, get used to the idea now. We’re going to have a recession, the question is just how long.

Recession storm clouds are already gathering. Walmart revenue was OK because working-class customers wanted refuge from price spikes. Target stock tanked worse than it has in 35 years as consumers hit the brakes on buying patio furniture and appliances, and started spending on experiences instead.

Sure, Home Depot and Lowe’s painted a rosier picture. Home projects, fueled by home equity, are still getting done. But beneath the surface even that doesn’t look so good. Home Depot revenues did well, but that’s because people bought less stuff for more money. Lowe’s blamed weather for the revenue miss, but guess what? It’s not the weather. Target didn’t blame weather for shortfalls in the same categories.

The truth is, a tumbling stock market is about to make us feel less wealthy, and rising interest rates will make us think twice about using home equity as a piggy bank for fun purchases.

We’re spending on experiences now, because we’ve been promising ourselves a fun summer after two years of COVID lockdowns. But when the bill comes due, at a higher APR, it’s going to be time to tighten belts by fall. Hello, recession.”

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*Why LinkedIn? On the Other Hand is about civil debate that illuminates the relevant facts. We’ve found that LinkedIn does a good job fostering that kind of environment.

On the Other Hand is Jon Fortt’s weekly segment on Squawk Box, Thursdays in the 7 a.m. ET hour. He’s been writing it just about every week since August 2020. The second (or first) argument each week isn’t necessarily the one Jon agrees with. He just makes an honest effort to construct the best argument he can for each side.

When he’s not debating himself, Jon co-anchors Overtime at 4 p.m. alongside Morgan Brennan. Jon also researches and writes the weekly Working Lunch segment on Power Lunch, Fridays in the 2 p.m. ET hour, where he introduces viewers to founders and CEOs through their origin stories and strategic goals.