Recessions are peculiar beasts. They’re both natural and normal, yet dreaded and inevitable.
In much the same way hurricane-prone regions can go years — even decades — without being ravaged by a storm, eventually the normal cycle of nature returns — and when it does, the damage inflicted can’t be assessed until long after things calm down.
Even then, these natural disasters can have both bad and good lingering effects for years afterwards.
To be sure, the U.S. has plenty of experience in the recession department, having met the “technical standard” for it a dozen times in the past 75 years (e.g., at least two back-to-back quarters of declining GDP — although these troughs can extend much longer), with each of these contractionary periods carrying unique and varying degrees of severity, and a mix of different causes.
As such, the recession forecasting business is booming right now, with a growing number of highly educated and paid prognosticators predicting that the world’s largest economy is likely headed for its second recession in as many years.
While that official distinction will not be made until the Business Cycle Dating Committee at National Bureau of Economic Research (NBER) declares it so, the group’s most recent determination of this sort was not made until mid-July — almost three months after the “storm” had subsided.
“The committee has determined that a trough in monthly economic activity occurred in the US economy in April 2020. The previous peak in economic activity occurred in February 2020. The recession lasted two months, which makes it the shortest US recession on record,” the NBER statement from last July read.
Bracing Before the Storm
Just like how cities, states and agencies prepare well in advance of a hurricane actually making landfall, so too have the nation’s retailers and businesses begun positioning themselves for the growing likelihood of continued consumer belt-tightening and economic distress. Whether an “officially declared recession” materializes later this summer or not, big retail plans to be ready for whatever happens.
“Our team and our suppliers need to do everything we can to keep costs low so that we can have values for customers that are meaningful. That’s the purpose of the company,” Walmart U.S. CEO John Furner told analysts and investors during the company’s Q1 earnings call May 17, a week in which the retailer reported “unexpectedly high costs” that crushed its bottom line and sent its stock down by 20%.
“We’re positioned to do well in great economies and economies that aren’t as good, so we’re going to be positioning ourselves to take care of our customers going forward, and our teams and our suppliers both need to do more to help customers out,” Furner added.
Both Walmart’s prediction challenges and its slumping stock price were surpassed the following day, after rival Target reported its own bottom-line miss, triggering a 30% plunge in its shares for the week.
Like Walmart and countless other retailers and businesses in other industries, Target is not waiting for confirmation from the NBER to adjust.
“We work each and every day to make sure we’re finding efficiency throughout our operation,” Target CEO Brian Cornell said on the retailer’s Q1 conference call on May 18. “Certainly, coming out of the first quarter, we are doubling down on finding operating efficiencies and greater effectiveness in the organization.”
“We know we’ve got to be really agile,” Cornell added, whether that means adapting to changing consumer trends or economic circumstances.
Pain and Action
With 70% of U.S. GDP derived from consumer and household spending, there’s really no reason to wait for trailing data to confirm what dozens of front-line reports from retailers have already implied, and what several dozen more are projected to say in the days and weeks to come.
While there’s sure to be nuances and pockets of company-level execution that deliver incrementally better or worse results, on the whole, the economic die has already been largely cast — meaning even a few outlier earnings reports this week are unlikely to have a material effect on the broader narrative.
This is not to say “official recession” is a foregone conclusion, as much as it is a declaration that “unofficial recessionary response” has already begun.
While things can and do change rapidly — as evidenced by the rapid crash and rebound between the second and third quarters of 2020, which saw U.S. GDP go from -31% to +34% in a matter of weeks — barring an immediate halt to the Russia-Ukraine war and a dramatic reversal in energy and gasoline prices, that is probably not a likely outcome.
In light of that, while expected changes in consumer buying habits have been identified, with increased demand for cheaper store brands versus labeled counterparts, that belt-tightening shift or trade-down has not been uniformly experienced by all retailers.
In fact, some higher end names like VFC’s North Face line of apparel posted record quarters, whereas more discount-oriented brands that were presumed to be well positioned for a bump from bargain hunters, such as Ross Stores, never saw it happen.
“On the trade-down customer, it’s hard to say,” Ross Stores Chief Operating Officer Michael Hartshorn said May 19 on the retailer’s Q1 call. “Obviously, with higher fuel and food prices, discretionary spending for the lower-end customer is being squeezed and we saw customers at both [Dress for Less and dd’s Discount] chains pull back on spending in the first quarter.”
Even so, Walmart CEO Doug McMillon said that while the retailer was seeing some indications of change throughout the quarter, that wasn’t true for all of its customers.
“I think it’s important to recognize that there’s more than one consumer. We serve the whole country… [and] we’ve got a breadth of customers and they behave differently,” McMillon said.