.jpeg "Source: U.S. Department of Labor, Bureau of Economic Analysis, Bloomberg, U.S. Bureau of Labor Statistics, Consumer Sentiment Index – University of Michigan, The Conference Board, U.S. Energy Information Administration")
August, the last full month of summer, the start of harvest season, National Back to School Month and the unofficial end of second quarter earnings season, is well underway. August is also a time for summer vacations. Recreational travel, consumer demand and spending appear to be strong; however, some recession indicators are providing mixed signals.
According to the U.S. Travel Association, spending increased to $105 billion in June 2022, a pandemic high and surpassing 2019 levels. Per Mastercard, travelers are spending 34% more on experiences, such as recreational activities, concerts and dining, while traveling. Furthermore, business travel and road trips have surpassed 2019 levels despite higher gas prices.
While inflation is still high and recession concerns remain, this earnings season is showing that demand in many areas continues to be robust. Overall, revenue growth year-over-year (YOY) is largely positive, with Chevron and Exxon Mobil reporting record quarterly revenues of 79.9% and 68.7% YOY, respectively. In retail, Walmart’s second quarter earnings surpassed analysts’ expectations, but issued warnings about increased average inventory days and concerns about excess inventory. For example, Target’s second quarter earnings dropped 89% and missed analysts’ expectations by a wide margin as it discounted prices to offload excess inventory.
Consumers are still spending. After considering inflation, consumers spent approximately 1% more in the second quarter. Several back-to-school surveys found that more than $650 (on average) will be spent per child in Kindergarten through grade 12 − more than in previous years and despite inflation concerns. In addition, Amazon’s Prime Day event in July saw sales jump 8% compared to the previous year. Amazon is also projecting a strong third quarter and is planning for a second Prime Day event in the fourth quarter.
On the contrary, while consumer spending is good for the economy, it may lead to more loan delinquencies in the near future if prices or interest rates continue to rise, or if the job market or wages weaken. According to the New York Federal Reserve, mortgage debt increased by $207 billion and credit card debt increased by $46 billion − the biggest YOY jump in two decades.
Unemployment benefit claims have also been rising despite a 53-year low unemployment rate of 3.5%. While 528,000 jobs were added in July, more than double the expectation, hiring freezes are becoming more commonplace. For example, Apple and Alphabet have announced plans to slow hiring, Amazon has about 100,000 fewer employees and Netflix laid off approximately 4% of its workforce in 2022.
The unemployment rate is a lagging recession indicator, with a high unemployment rate typically confirming a recession rather than predicting it. In the United States, the National Bureau of Economic Research (NBER) officially declares a recession, often months after its start. The previous six recessions were declared on an average of 233 days after the peak. If January 2022 was the peak of the current economic cycle, 222 days have elapsed since that peak.
While inflation is still high and consumer sentiment is at historic lows, recessions are generally periods of deep and pervasive economic downturn. As we see in the non-exhaustive list included in this week’s chart, other recession indicators are providing mixed signals.
Key Takeaway
As the summer draws to a close, recession risks remain mixed as consumer sentiment is at historic lows, employment levels remain strong and some companies enjoyed a rally following a mostly positive earnings season.
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