Anatomy of a slowdown

Unlock the Editor’s Digest for free

Good morning. Argentina has elected self-described “anarcho-capitalist” Javier Milei to the presidency. He has promised to take a “chainsaw” to government spending and to dollarise the economy in an effort to stop triple-digit inflation. Whatever you think of Milei’s ideas, he clearly adds a layer of complexity to an already confusing geopolitical scene. Email me your thoughts:

What kind of slowdown is this, anyway?

It is no surprise that US economic growth is slowing. No one thought that the astonishingly strong third-quarter gross domestic product result was sustainable. At Unhedged we first noted a softening in growth almost two months ago. The number of positive surprises in the economic data peaked and started to decline in August. In September credit card spending slowed a bit, subprime consumer delinquencies were rising and a few consumer-facing companies began to warn of weakening demand.

Even so, last week’s third-quarter earnings report from Walmart provided the market with a bit of a shock. The stock (market cap $420bn) fell 8 per cent on Thursday and Friday. Two messages from the company’s conference call have had an effect on Wall Street’s mood: we may be in a deflationary environment, and consumer demand looks a bit wobbly. Here’s the company’s CEO:

General merchandise prices continue to come down. GM is down low to mid-single digits versus last year. That enables us to roll back pricing . . . In the US, we may be managing through a period of deflation in the months to come.

And the CFO:

We see our customers showing ongoing discretion and making trade-offs to be able to afford the things they want, given the sustained high cost of the things they need. Recently, we’ve experienced a higher degree of variability in weekly performance and between holiday events in the US, including seeing a softening in the back half of October that was off-trend to the rest of the quarter.

Walmart is the biggest retailer by sales in the country, so these comments matter. But keep them in context. Remember that they came along with a strong third-quarter report, and Walmart did not cut its sales targets for the year. Executives also said November was looking better than October.

Remember, too, that personal consumption expenditures contributed a meaty 2.7 percentage points to US GDP growth in the third quarter. If that falls by a percentage point or so in the fourth quarter, which many economists expect, that would be a significant slowdown that is consistent with Walmart’s comments, and it would mean growth would be just fine, by historical standards, in the fourth quarter.

Indeed, Walmart’s comments about demand are consistent with the longer term trends in retail sales we see in the government data: a gentle slowdown with quite a lot of variety among different retail categories. Some goods categories (building materials and furniture) seem to be giving back the growth from the pandemic boom while others (food, clothing) seem to be setting into normal trend-level growth (“general merchandise” in the chart below includes big box stores like Walmart).

Line chart of US retail sales, year-over-year % change showing Slowdowns and normalisations

Walmart’s comments about deflation should not come as a surprise, ether, given that producer prices fell in October. But hearing the word from the mouth of Walmart’s CFO will make the reality of goods deflation vivid for analysts who might otherwise have waved off the government data for technical reasons.

A complicating factor is that you cannot read directly from Walmart’s results the state of the American consumer. Walmart is a well-run company with immense scale and a strong ecommerce operation, which has taken share from rivals. Because its prices are low it gets the benefit of trading down when households are under pressure. So it is worth looking at what other major retailers are saying, too.

An interesting example is BJ’s Wholesale, a members-club bulk retailer that is popular among a wide range of consumers. It had something to say about the demand among different income groups:

Our mid- and higher-income members continued to increase both spend and trips [in the third quarter but] waning government aid has been a strain on our lower income members this year. These members continue to exhibit similar shopping behaviour, maintaining trip frequency versus last year as well as using other forms of tender to supplement their purchases. However, despite [this] . . . third quarter sales from our lower income cohort dipped below last year levels

Like Walmart, BJ’s is seeing price deflation in certain categories.

Retailers that lack the structural advantages of Walmart and BJ’s have been making comments about the stretched consumer for several quarters now. Walmart’s rival Target is typical of this. Here’s an excerpt from its call last week:

Consistent with prior quarters and overall industry trends, discretionary categories were the driver of [the] decline [in same-store sales] . . . Overall, consumers are still spending, but pressures like higher interest rates, the resumption of student loan repayments, increased credit card debt and reduced savings rates, have left them with less discretionary income, forcing them to make trade-offs in their family budgets

Similarly, department-store operator Macy’s said last week: “The consumer is still under pressure, that is nothing new on that.” Like BJ’s, Macy’s serves a wide range of households, but it noted that even high-end products were seeing weaker demand, too: “There’s no doubt that there’s a normalisation happening in the luxury sector.” Williams-Sonoma, which sells high-end kitchen goods and high-ish-end home furnishings, more or less echoed that sentiment and emphasised its efforts to sell more value-priced items.

But again, it is important to bear in mind that retailers’ views of the economy depend on their product offering and the structural advantages and disadvantages of their businesses. The discount clothing chains TJX and Ross Stores reported strong same-store sales and good margin performance in the third quarter. Their consumer is just fine.

How to sum up the message from the macro data and retailers’ third-quarter reports? We are in a consumer slowdown, but it is a mild one so far, as reflected by the good results at the stronger retail chains. The slowdown is more severe in, but not confined to, the lower end of the income spectrum. Given how strong growth was in the middle of this year, none of this is surprising. The trend in goods prices is generally disinflationary and, in spots, outright deflationary. All of this is consistent with a soft or softish landing rather than outright recession, but the trends bear watching. On to the Christmas season.

One good read

Thoughts on drug decriminalisation from a tolerant but mildly grouchy New Yorker.


This website uses cookies. By continuing to use this site, you accept our use of cookies.