A slowdown in consumer demand will likely have negative implications for the economy. Outside of retail sales or personal consumption expenditures, there are other measures we can look to for insight on expectations for consumer demand.
Tracking new order growth provides a view into how much product businesses are putting on-line given their expectations for demand. New durable goods orders decelerated to 3.0% y/y, its slowest pace since February 2021 despite a large defense order. Excluding defense, new orders decelerated to 1.7%, its slowest pace since August 2020. Given where inflation measures came in for January, these growth rates were actually negative when adjusted for prices. Effectively, new orders reflected price increases but negative unit growth which is not a good sign for demand. This is similar to what we have seen in other parts of global trade data like Japan and Germany. In our global system, a slowdown in U.S. demand will likely impact global economic activity.
Another way to track demand is through wholesale and retail inventories. Wholesale inventories accelerated at record y/y rates sequentially from December 2021 through June 2022. Since then, they have decelerated on a rate of change basis but remain north of 15% y/y with the latest release coming in at 15.8% y/y. However, on a m/m basis inventories went negative for the first time since July 2021. While the y/y rate is still elevated, the negative m/m print is the first sign of a reversal in the inventory accumulation we have seen over the last two years. Moving down stream, retail inventories, excluding automobiles, accelerated m/m in January for the second month in a row. For retailers, increasing inventory in a period of weak consumer demand will most likely have a negative impact on profitability.
In the current environment it is important to highlight what actual businesses are reporting as it relates to demand and inventories. Over the last few weeks, we have heard from several consumer-related companies on earnings calls. With 72 of 94 companies in the SPDR S&P Retail ETF (XRT) reported for 4Q22, earnings have declined -14.22% y/y on +5.22% y/y revenue growth. Since the final quarter of 2022, the orders and inventory dynamic has not improved which will likely lead to pressure on margins. The table below summarizes guidance and commentary from a few larger retail companies in their latest earnings reports.
Click image to enlarge.
Source: Koyfin, Company Earnings Transcripts.
In the period following pandemic shutdowns, consumer demand accelerated which led to upstream over-ordering and an accumulation of inventory. The current dynamic is likely reflecting the downside of the bullwhip effect. To unwind this, new order growth and inventories would have to decelerate, or consumer demand would need to accelerate. We are seeing more evidence of the former than the latter at this point, which has negative implications for broader economic activity.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC