For retailers and brands, the next recession may already be here

Most economists see a recession as unlikely, but consumers believe it has already begun. What do the data say?

The bullish narrative of the past year or two about steady growth in consumer spending, slowing inflation and solid job growth ran up against the wall of reality this week, as evidenced by a sudden and dramatic decline on Wall Street. The sell-off comes after a series of weak quarterly results from a broad range of consumer-facing companies and rising unemployment. It’s a good time to ask:

Is the Post-Pandemic Consumer Party Over? Is This the Beginning of a Recession?

On the one hand, most 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 probability of a recession in the next 12 months has fallen significantly. The Wall Street Journal reported just last month that a survey of business and academic economists indicated there would be no hard landing. Instead, they suggest the economy is simply “normalizing” after an extended period of growth.

On the other hand, a majority of shoppers in one study said they believed we were already in a recession.

The latest wave of sales disappointments and profit warnings has come from nearly every sector of the consumer economy, which accounts for about 70% of U.S. gross domestic product (GDP). Brands reporting slowing sales are as diverse as Mercedes-Benz and McDonald’s. Pepsico’s Frito-Lay North America reported a 4% drop in sales volume as consumers increasingly opt for cheaper private-label alternatives. Apple’s iPhone sales were disappointing. Procter & Gamble (Tide and Charmin toilet paper) reported a 7% profit drop. The luxury fashion market is also shrinking, according to a report from LVMH (Louis Vuitton).

Meanwhile, as we noted here recently, discounters are benefiting from inflation as shoppers shift toward lower prices—a trend that’s been building for some time. Credit-card debt and late payments are on the rise. Shoppers have become ruthlessly adept at comparing prices online, putting pressure on margins. It’s estimated that more than 60% start their product searches on Amazon.

Given all this, it’s hard to shake the feeling that a recession seems inevitable.

None of this should come as a surprise to those who study consumers. According to Affirm, a buy-now-pay-later e-commerce platform, a recent study found that a majority of respondents believe the economy is in recession by March 2023 and that it will last another year.

Sudden, dramatic global recessions like the one that followed the pandemic lockdowns in 2020 are rare. Instead, economic recessions tend to start slowly and gradually gain momentum and scope. Claudia Sahm, chief economist at New Century Advisors, is credited with creating the most accurate recession forecaster. Sahm says recessions start out like a snowball rolling downhill, getting bigger and bigger, until they become avalanches. In a recent interview with Bloomberg, Sahm said that while the economy is not yet in recession, the outlook “doesn’t look bright.”

If he’s right, the next year could see another shakeup of brands and retailers that have failed to pay attention to the state of the consumer, whose balance sheets are burdened with debt and who don’t know how to reach their core audiences. Target, which we recently covered and is struggling to reverse a sales slump, is particularly vulnerable, as are fading department store brands like Macy’s.

The survivors will be retailers like Dick’s Sporting Goods, which has built a loyal customer base by creating community-focused promotions and programs that support local sports teams; Tractor Supply, which saw a new customer base — urban refugees — buying pet food and durable outerwear during the pandemic and effectively changed its product mix to accommodate them; and Ace Hardware, which consistently receives the highest customer satisfaction rating on J.D. Power.