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The Green Sheet Online Edition

July 25, 2022 • Issue 22:07:02

Getting a handle on an economy in transition

By Patti Murphy

U.S. businesses are operating in a vastly different economy than they did just a year ago. But ask a handful of economists what this means for businesses and consumers and you are apt to get a handful of different answers.

The inflation rate surged to 9.1 percent in June, according to the Bureau of Labor Statistics. This is higher than the 8.6 percent logged in May and the highest rate recorded in 40 years. On top of that, interest rates are climbing as the Federal Reserve seeks to dampen inflation, and supply chain bottlenecks and labor shortages continue to plague many businesses. This has caused significant consternation.

According to a recent survey conducted by JPMorgan Chase, midsize businesses across the United States are increasingly cautious in their economic outlooks. The bank's 2022 business leaders outlook pulse surveyed leaders at over 1,500 midsize businesses in June and found only 19 percent are optimistic about the national economy for the year ahead, down from 75 percent a year ago.

"The first half of 2022 has really tested business leaders with pricing pressure and increased interest rates, on top of supply chain and labor-related issues they were already facing," said Ginger Chambless, head of research at JPMorgan Chase commercial banking. "While it's surprising to see how drastically sentiment has shifted, it is important to note that business leaders are still mostly upbeat when it comes to their companies and areas that they can more directly control." Seven in 10 respondents expressed confidence in their own companies' performance, and 55 percent were upbeat about their industry's performance.

A 2022 business barometer report, published in June 2022 by Portland, Ore.-based Umpqua Bank, offers a similar assessment. "While last year's surging economic optimism has diminished, businesses of all sizes remain confident in their own prospects for growth," wrote Tory Nixon, Umpqua Bank's president.

The National Federation of Small Businesses reported on July 12 that economic optimism among small business owners had hit an all-time low, with the net percent of owners who expected real sales to grow falling 13 points in May. Small businesses are also raising prices at levels not seen since the early 1980s, when prices were rising at double digit rates, the NFIB said.

"As inflation continues to dominate business decisions, small business owners' expectations for better business conditions have reached a new low," said NFIB Chief Economist Bill Dunkelberg. Talk of a looming recession has picked up in recent months as the Federal Reserve raised interest rates, which some experts predict will dampen spending. But Jack Kleinhenz, chief economist at the National Retail Federation, is more optimistic, noting that the financial health of consumers is strong, which bodes well for avoiding recession.

"Regardless of the prospect of a downturn or whether it will meet the threshold of a recession, the consumer outlook over the next few months remains favorable," Kleinhenz said. "The economy is moving away from extremely strong growth toward moderate growth, but increased income from employment gains, rising wages and more hours worked is expected to support household spending."

Definitions vary, but a recession is generally considered several quarters of significant economic decline as evidenced by negative growth in gross domestic product. U.S. GDP shrank at an annual pace of 1.6 percent in the first quarter of 2022, according to the Bureau of Economic Analysis. That's a sharp reversal from the 6.9 percent increase recorded in the fourth quarter of 2021.

At press time, GDP data for the second quarter of this year was not yet reported, but the Conference Board predicted GDP growth of just 0.8 percent for the quarter.

The research group stated that it does not believe the U.S. economy is in a recession, but added that "economic growth will continue to cool through 2022, and a short mild recession is on the horizon. High inflation and rapid monetary tightening [by the Fed] are the drivers."

Consumers cautious, but continue to spend

Against a backdrop of fears about inflation and recession, consumer spending remains strong. The Federal Reserve Bank of New York, which regularly collects data on consumer economic sentiment, reported an increase in short-term inflation expectations on the part of consumers, but a decline in medium- and longer-term expectations.

For example, expectations are that the inflation rate one year from now will rise to 6.8 percent in June; in May the expected rate was 6.6 percent. The expected inflation rate for three years from now fell from 3.9 percent to 3.6 percent, the New York Fed reported.

The Bank of America Institute reported that total aggregated Bank of America credit and debit card spending rose 11 percent year-over-year in June 2022, following year-over-year increases of 9 percent in April and 13 percent in May. Spending growth per household increased 3.3 percent year-over-year in the 28 days before June 30, the think tank noted. Rising gas prices are driving some increases, but spending on services like travel and entertainment continues to be boosted by pent-up demand, BofA said.

According to the Mastercard SpendingPulse, which measures in-store and online retail sales across all forms of payment, U.S. consumer retail spending, excluding automotive, rose 9.5 percent year-over-year in June; excluding auto and gas spending it was up 6.1 percent year-over-year. When compared to June 2019 (or pre-pandemic spending) total retail spending, excluding auto, was up 20.8 percent year-over-year, Mastercard said.

Consumer spending represents about two-thirds of the U.S. economy, according to the Fed.

"Consumers are in better shape to respond to a slowdown in the U.S. economy than they have been in many previous business cycles," said David Tinsley, senior economist at the Bank of America Institute. "But with some slowdown in services spending, we may need to wait until summer is over to get a clearer picture of the strength of the underlying consumer momentum."

Meanwhile, research conducted by the Center for Generational Kinetics points to weak consumer balance sheets. The survey found 51 percent of workers are short on money before they get to payday. The last time the survey was run, in 2018, it was 24 percent. This is not just happening with lower income consumers. Over a third of workers reporting household incomes in excess of $250,000 have found themselves in that position this year, the research center said.

A recent blog post by Harvard economist Jason Furman suggests consumer spending may belie sentiments expressed to pollsters. "When consumers speak to pollsters, they register a dour mood; but whether shopping online or in person, they are still buying at an increasing pace," he wrote. "The big question, then, is whether the spending boom will last."

Seizing strategic advantages

Among business leaders surveyed by Umpqua Bank, 34 percent rated economic conditions as good or excellent in the United States, down from 41 percent in 2021. Those rating the economy as poor increased from 18 percent to 34 percent.

"We definitely see more caution on the part of all businesses, given a series of economic factors outside their control," said Richard Cabrera, head of middle market banking at Umpqua. "But tempered expectations can be a strategic advantage, making companies more prepared to weather storms and better positioned if the economy surprises to the upside."

Some of the spending increases, especially in categories like groceries, were likely prompted by Covid. (Mastercard's SpendingPulse shows spending on groceries in June was up 14 percent over June 2021 and 24.8 percent over June 2019.)

"It's interesting; we've found that consumer behavior has been quite continuous, meaning consumers have been spending – and spending more than in past years – on a range of categories that were made bigger by Covid," said Tamara Charm, a partner with the consultancy McKinsey & Co.

Grocery delivery was one of the stickiest behaviors to come out of the pandemic, Charm noted, with 65 percent of consumers surveyed by McKinsey saying they use grocery delivery services and plan to continue to do so. end of article

Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the fourth estate. Follow her on Twitter @GS_PayMaven.

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