It has been a messy year for macroeconomic analysis. The wild fluctuations in inflation, energy prices, the stock market and consumer behavior have all made mistakes by companies and investors alike. Retailers have been caught in these shifts, as evidenced by both Walmart and Target’s mishandling of consumer behavior that began in March. Stores had a lot of goods that consumers didn’t buy because they shifted their spending to travel and leisure, or were squeezed by inflation.
Fixing these mistakes has caused trouble for retailers. But this week both Walmart and Target said on earnings calls that they are almost back where they want to be. This is important because it means retail may again shift to being the driver of growth, putting pressure on the economy. And it 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 inventory reduced real GDP growth by 2% in the second quarter as companies began to liquidate their excess inventories. In 2021, retailers added 400,000 jobs as they resumed post-pandemic job cuts, but since February this year, they have cut 20,000 more.
This change has also been reflected in the freight business. The trucking market fell this spring once retailers changed their behavior, and sea freight rates fell as demand changed and the supply chain normalized.
When you’re in a store that becomes heavily stocked, simply selling off the inventory often isn’t enough—you cancel orders too, and that adds to the negative economic impact. Walmart said it canceled “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 across our discretionary categories.” including the removal of declining receipts.
But the thing about inventory cycles is that changes, while sometimes abrupt, tend to be minimal. Addressing the excess inventory, John Rainey, Walmart’s chief financial officer, said, “At the end of Q1, we said it would take a few quarters to work out. I’ll just reiterate that it’s true. Target, for its part, said it was more or less where it wanted to be, which is why it anticipates a favorable profit margin for the rest of the year.
All this should change the mindset of those who are constantly focusing on slow economic growth. Joe Weisenthal of Bloomberg News noted this week that the economy is reeling from some retail shocks from last spring, with trucking-company stock prices rallying.
Walmart and Target going back to the expanded list in the next quarter or two could point to faster economic growth for the rest of this year. Surveys of companies may soon pick up new orders again. Freights falling for months and prices of goods may rise again.
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 industry to complete its post-pandemic slowdown and return to growth. On the other hand, accelerating growth at a time when the Fed is looking to slow it down could signal an alarming rise in inflation.
But it appears that we are moving into the next few months. The retail slump of the last 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.
Bloomberg
