Most economists rate a recession as unlikely, but consumers believe it's already started. What does the data say?
The optimistic narrative of the past year or two about steady consumer spending gains, slowing inflation, and robust job growth hit a wall of reality this week, as evidenced by Wall Street’s sudden and dramatic nosedive. The selloff follows a spate of weak quarterly results from a wide swath of consumer-facing companies and an uptick in unemployment. It’s a good time to ask:
Is the post-pandemic consumer party over? Is this the start of a recession?
On the one hand, the majority of economic forecasters are predicting a soft landing or no recession at all. According to a survey of members of the National Association of Business Economics, the chance of a recession in the next 12 months has dropped significantly. The Wall Street Journal reported just last month that a poll of business and academic economists indicated there would be no hard landing. Instead, they suggest the economy is just “normalizing” after a prolonged period of growth.
On the other hand, the majority of shoppers in one survey said they believe we’re in a recession already.
The recent flurry of sales disappointments and earnings warnings came from nearly every sector of the consumer economy, which accounts for about 70% of US gross domestic product (GDP). Brands reporting slowing sales are as diverse as Mercedes-Benz and McDonald’s. Pepsico’s Frito-Lay North America saw a 4% decline in sales volume as consumers increasingly opt for less expensive store brand equivalents. Apple iPhone sales have been disappointing. Procter & Gamble (Tide and Charmin toilet paper) posted an earnings decline of 7%. The luxury fashion market is sputtering too, according to a report from LVMH (Louis Vuitton).
Meanwhile, as we noted here recently, discount chains have been reaping the benefits of inflation as shoppers trade down—a trend that’s been developing for some time. Credit card debt and delinquencies are on the rise. Customers have become ruthlessly savvy about online price comparisons, putting pressure on margins. It’s estimated that more than 60% begin their product searches on Amazon.
Add it all up, and it’s hard to escape the conclusion that a recession seems inevitable.
None of this ought to be a surprise to those who study consumers. According to Affirm, a buy now-pay later e-commerce platform, a recent survey found that most respondents believed the economy has been in a recession since March 2023 and that it will last another year.
Sudden, dramatic global recessions like the one that followed the pandemic shutdown in 2020 are rare. Instead, economic downturns develop slowly at first and gradually pick up steam and scope. Claudia Sahm, the chief economist at New Century Advisors, is credited with creating the most accurate recession predictor. Sahm says recessions start like a snowball rolling downhill, getting bigger and bigger until they become avalanches. In a recent interview with Bloomberg, Sahm stated that while the economy is not in a recession yet, the outlook “does not look promising.”
If she’s right, the next year may see another shake-out of brands and retailers who haven’t been paying attention to the state of the consumer, whose balance sheets are debt-heavy, and who haven’t figured out how to connect with their core audience. Particularly vulnerable is Target, which we reported on here recently and is in the midst of trying to turn around a sales decline, as well as fading department store brands like Macy’s.
Survivors will be retailers like Dick’s Sporting Goods, which has built a loyal customer base by creating community-centric promotions and programs that support local sports teams; Tractor Supply, which noticed during the pandemic that a new customer group—urban refugees—were buying pet food and rugged outerwear and successfully changed its product mix to match; and Ace Hardware, which consistently earns the highest rank for customer satisfaction by J.D. Power.
