I’m no happier than anyone else to see a shaky stock market, Recently sparked by profit misses by big retailers like Target and Walmart. But I’m happy with some details. You should too.
One of the reasons retailers are underperforming is that they have built up inventories of items that are now struggling to sell.This could force them to sell excess inventory at a discount because As reported by Yahoo Finance’s Brian Cheung on May 19.
This is good news! Here’s why: Remember yesterday, when the biggest problem in the economy was a shortage of goods? Broken supply chain? Chip shortage? Port clogged? Missing a truck driver? any bells?
A big reason for inflation (now at 8.3%) is the huge mismatch between soaring demand for furniture, appliances, electronics, home improvement materials and other things we spend all our money on during the stay-at-home phase of the COVID-19 pandemic. Few people wanted to go out or travel back then, which led to a massive shift in spending toward goods rather than services. Commodities are in short supply, prices are soaring, and ordinary things suddenly have time to wait.
If retailers are now telling us they have more stuff than people want to buy, it means consumers are rebalancing their spending back to more normal patterns. yes! It has been a long time. This is good news for the direction of inflation.
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Consumers may buy less at Target and Walmart (and Amazon), but spending remains strong. Retail sales were strong in March and April, but the biggest gain in April came from cars — Target and Walmart don’t sell cars. Americans also spend less on food they eat at home and more on eating out. The April numbers tell us what happened in the first quarter of the second quarter, while the Target and Walmart results are the first quarter numbers. Anyone who can remember this long probably remembers the COVID Omicron surge that sent shoppers back into hibernation in early 2022.
travel booking Because this summer is strong. This won’t show up in economic data until late summer or fall, and it won’t show up in travel company earnings data until late summer or fall. At the same time, there are likely to be many reports of high ticket prices, overbooked planes and crowded hotels. But that’s what returning to normal looks like. That’s an encouraging sign and something economists have been watching since the COVID recovery accelerated in late 2020.
The Federal Reserve is raising interest rates quite aggressively to dampen consumer and business demand for goods purchased on credit. Higher interest rates make those purchases more expensive, while consumers buy less. Reduced demand ultimately leads to lower prices.
Retailers tell us that demand for something is already declining. This is the beginning of controlling inflation. Again, these first-quarter numbers were mostly in before the Fed started raising rates. Actual rate hikes in the second quarter and beyond could further reduce retailers’ profits. That might explain why these stocks have been unfairly hit. But anything that reduces inflation should be good for the overall economy.
Other categories of inflation may still be troublesome.The most obvious problems for consumers are high gasoline and home energy prices, and this could get worse As Russia’s war in Ukraine drags on, more countries have stopped buying Russian oil. As more spending shifts in this direction, inflation in services is likely to pick up. However, it would again be a welcome shift towards a pre-pandemic spending pattern and ease stressful commodity supply chains.
For now, markets see none of this as good news as they assess the likelihood of a recession in six to nine months’ time. Since consumer spending is such an important part of the U.S. economy, any sign of a drop in spending could mean the Fed is over-mobilizing and suppressing demand. The market also doesn’t have a good mechanism for measuring the unprecedented changes in spending we’ve seen during the pandemic, including changes that may now return to normal.
However, if Target’s discounts and cheaper items overall do reduce inflation, the market will roar. The next batch of inflation data, due on June 10, is down significantly from the current 8.3% level, suggesting the Fed may have more leeway in raising interest rates than the market now expects. If inflation continues to decline in the coming months, markets will start to feel more comfortable with the idea that the Fed can lower inflation without causing a recession. Even retailers will cheer for it.
Rick Newman is the author of four books, including “Rebounders: How winners turn from setbacks to success.” Follow him on Twitter: @Rick Newman.
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