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Global Monitor / US Retail Analysis

US Retail Flying Right into Cloud of Uncertainties

Soaring inflation, protracted supply chain bottlenecks and a war in Europe that might escalate soon: all indicate uncertain days ahead for US retail.

By

17 March 2022

 5 minutes
Long Story, Cut Short
  • The Federal Reserve on Wednesday stepped in, as was expected, and raised interest rates by a quarter percentage point. As many as six more such hikes are expected this year.
  • In the near future, the invasion (of Ukraine) and related events are likely to create additional upward pressure on inflation and weigh on economic activity.
  • Inflation in advanced economies do have a bearing on other countries, through what is known as "imported inflation" or "beggar-thy-neighbour effect." Inflation in the US is everyone else’s headache as well.
Retail sales growth in the US slowed down 0.3% month-on-month in February, down from the upwardly revised 4.9% jump in January. The US consumer price index increased 7.9% year-on-year to 284.18 points in February—the biggest annual rise since January 1982.
Sales Are Down Retail sales growth in the US slowed down 0.3% month-on-month in February, down from the upwardly revised 4.9% jump in January. The US consumer price index increased 7.9% year-on-year to 284.18 points in February—the biggest annual rise since January 1982. Tristan Colangelo / Unsplash

All is not well on the US retail front, what with the highest inflation rate in over four decades, and the war in Europe is set to make things worse. The Federal Reserve on Wednesday stepped in, as was expected, and raised interest rates by a quarter percentage point. As many as six more such hikes are expected this year.

Policymakers at the Federal Reserve, the central banking system of the US, voted 8–1 to lift their key rate to a target range of 0.25–0.5%. The rate hike is the first since 2018 and is expected to result in higher loan rates for many consumers and businesses.

The signs have been ominous. Retail sales growth in the US slowed down 0.3% month-on-month in February, down from the upwardly revised 4.9% jump in January. The US consumer price index increased 7.9% year-on-year to 284.18 points in February—the biggest annual rise since January 1982. And the Europe war is just beginning to pinch.

The Federal Open Market Committee (FOMC) said in as many words in a statement: "The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity."

The Fed is skating on thin ice. If it tightens the screws too slowly, inflation can actually spiral out of control. And, if the Fed does it too fast, markets can be adversely hit and push the economy into recession.

The latest CNBC Fed Survey, released on Tuesday, raised the probability of a recession in the US to 33% in the next 12 months, up 10 percentage points from the February 1 survey. The respondents, who included fund managers, strategists and economists, projected the chance of a recession in Europe at 50%.

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Federal Open Market Committee (FOMC) participants gather at the William McChesney Martin Jr Building in Washington, DC, for a two-day meeting held on 15-16 March 2022.
Deciding on a Hike Federal Open Market Committee (FOMC) participants gather at the William McChesney Martin Jr Building in Washington, DC, for a two-day meeting held on 15-16 March 2022. Federal Reserve System

Retail growth has slowed down, but sector still expected to grow

The retail sector is not growing as fast as many had expected. In February, statistics released also on Wednesday, it had already slowed down with sales increasing only 0.3% in February. According to the US Commerce Department, the figures for January were revised sharply higher to show sales rising 4.9% instead of 3.8% as previously reported. Sales at clothing and clothing accessories stores were down at 1.1% in February from 1.4% the previous month.

Non-store sales including e-commerce and digital sales dropped 3.7% compared to January, accounting for 14.6% of total retail sales. Non-store sales the previous month were 15.2% of total retail sales. The slowdown of online shopping was possibly because of the lifting COVID-19 restrictions. Yet, on a year-on-year basis, retail spending was up 17.6%.

All these numbers are from a time when Europe was still on the brink of war, and Russian troops had not yet started crossing over into Ukraine.

The Fed word of caution notwithstanding, retail is still expected to grow. The National Retail Federation (NRF) on Tuesday issued its annual forecast, anticipating that retail sales would grow 6-8% to more than $4.86 trillion in 2022.

“NRF expects retail sales to increase in 2022, as consumers are ready to spend and have the resources to do so,” NRF President and CEO Matthew Shay emphasised. “We should see durable growth this year given consumer confidence to continue this expansion, notwithstanding risks related to inflation, COVID-19 and geopolitical threats.”

"NRF forecasts that 2022 retail sales will total between $4.86 trillion and $4.95 trillion. The numbers exclude automobile dealers, gasoline stations and restaurants. Non-store and online sales year-over-year, which are included in the total figure, are expected to grow between 11 percent and 13 percent to a range of $1.17 trillion to $1.19 trillion as consumers continue to utilize ecommerce.

The 2022 figure compares with 14 percent annual growth rate in 2021, the highest growth rate in more than 20 years. This year’s sales forecast is notably above the 10-year, pre-pandemic growth rate of 3.7 percent."

Online boom

Online shopping in the US was US$1.7 trillion over two years of the pandemic (March 2020 to February 2022), according to Adobe's Digital Economy Index. This was US$609 billion more than the two preceding years.

As Inflation Rises

Rising prices led to consumers spending US$32 billion more for the same amount of goods over that period. And now, inflation will lead consumers to spend as much as US $27 billion more online for the same amount of goods. That's how inflation rises, and ecommerce continues to boom.

The Fed word of caution notwithstanding, retail is still expected to grow. The National Retail Federation (NRF) on Tuesday issued its annual forecast, anticipating that retail sales would grow 6-8% to more than $4.86 trillion in 2022.
Up for Sale The Fed word of caution notwithstanding, retail is still expected to grow. The National Retail Federation (NRF) on Tuesday issued its annual forecast, anticipating that retail sales would grow 6-8% to more than $4.86 trillion in 2022. Artem Beliaikin / Unsplash

Inflation at a record high, and that's cause for worry everywhere else

The US inflation rate of 7.9% is four times the Fed target of 2%. And the inflation is not confined to the US alone. In November 2021, a Pew Research Center analysis of data from 46 nations found that the third-quarter 2021 inflation rate was higher in most of them (39) than in the pre-pandemic third quarter of 2019. "In 16 of these countries, including the US, the inflation rate was more than 2 percentage points higher last quarter than in the same period of 2019.

Inflation in advanced economies do have a bearing on other countries, through what is known as "imported inflation" or "beggar-thy-neighbour effect." Tighter screws on inflation through interest rate hikes, as the Fed has done, results in investors start pulling monies out of arguably risky segments like equities, commodities and foreign markets. Companies scramble to park their wealth back in the US, and this leads to a flight of capital (and less FDI flows) in other countries. In other words: inflation in the US is everyone else’s headache as well.
Nevertheless, there is only one catch here: all these crafty calculations and measured surmises have no inkling of the course that the Russia-Ukraine war is going to take, and for that reason have embedded in them the potential for a huge margin of error.

Out of Stock

Consumers will continue to feel the brunt of ongoing supply chain bottlenecks and short supply of goods, including apparel; the chances of seeing an “out-of-stock” message is one in 59 pages, up from one in 200 pages before the pandemic.

Online Clothing

Electronics accounted for 18.6% of overall e-commerce sales, followed by apparel (14.3%) and groceries (8.9%). US Census data found a 24% year-over-year increase in clothing and accessories sales in January 2022. People will keep buying apparel.

The Question of Disposable Incomes

Fuel prices in the US have been skyrocketing over the last few weeks. But will this lead to less consumer spend? ETF Trends has a theory:

"In 1980, the 463 gallons of gasoline purchased for $1.18 a gallon by the average American cost a record 6.16% of disposable income. In 2012, when gasoline prices averaged a record $3.54 a gallon, the 426 gallons purchased by the average American only cost 3.79% of disposable income. For expenditures as a percentage of disposable personal income to hit the same level as 1980, we estimate that gasoline prices would need to double again from today’s prices to over $7 a gallon."

 
 
  • Dated posted: 17 March 2022
  • Last modified: 17 March 2022
 
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