Is a Massive Recession Coming?

Recession concerns have been kept at bay by a handful of economic sectors, including pharmaceuticals, food, and big-box retail. These economic areas are grouped into the S&P Consumer Staples Index. Until recently, the Consumer Staples Index was one of just three sectors in the S&P 500 that hadn’t suffered in 2022. Now that Target and Walmart have released warnings about earning expectations, the threat of a recession seems even more significant.

Walmart Delivers Bad News

Walmart delivered some bad news to investors when it released its Q1 financials on May 17, 2022. Although the company had strong revenues, it spent more than expected on wages and fuel. International sales were also negatively affected by currency fluctuations.

Doug McMillon, President and CEO, tried to sound cheerful in a note promising that the company plans to adjust to economic changes so it can deliver profit growth while meeting the needs of customers. The note also pointed to U.S. inflation for its role in unexpected challenges. The increased prices of food and fuel were particularly difficult for Walmart, as these essentials have forced consumers to spend less on other goods.

The stock market responded as one might expect. Walmart’s share price fell from $148.21 on May 16 to $131.35 on May 17. Prices continued to fall in the subsequent days. So what comes next?

Enter Target for a clue.

Target Has Similar Concerns

Target delivered more discouraging news when it released its corporate earnings report on May 18. The numbers showed low, single-digit growth. Even worse, Target advised investors to expect similarly low growth for the next quarter.

Big-box stores like Target and Walmart usually weather economic struggles well. The companies’ performances are closely tied to how consumers feel about their financial prospects. If they have money to spend on unessential goods, they usually do it at big-box stores that offer lower prices and easy shopping experiences.

The recent numbers suggest that consumers either don’t have money to spend on unessential goods or they are holding cash, likely because they anticipate a rough road ahead.

Will the Fed’s Interest Hikes Hurt Consumer Spending Even More?

The Fed has been upfront about upcoming interest rate hikes in hopes that it can slow inflation.

Economics 101 says that increasing rates will slow borrowing. But inflation takes many forms and higher prices stemming from supply constraints cannot be combatted by higher rates. But higher interest rates could hurt consumer spending, creating a stagflation environment much like the 1970s.

There is potential for this situation to spiral out of control. The Fed raises interest rates to curb inflation. Interest rates make it harder for businesses and individuals to access funds, so they spend less money. Lower spending tips the economy over into a recession. And all of this is compounded by continued supply chain constraints, not least from China’s ongoing lockdowns.

Other Factors Driving Recession Concerns

Recessions are remarkably common, and typically happen at least once per decade on average, including:

• 1981–1982
• 1990–1991
• 2001-02
• 2008-09

The technology bust of 2001-02 and the Great Recession happened between December 2007 and June 2009 ranked among the worst. During the Great Recession, unemployment reached 10%, and GDP fell 5.1%, an amount not seen since the 1940s.

Today, the risks to recession are many, including energy prices and war.

Rising Fuel Prices

Fuel prices have frequently played roles in recessions. The U.S. Energy Information Administration (EIA) reports that the average gasoline price was above $4.20 in April 2022. Prices at the pump haven’t been that high since the middle of the Great Recession in 2008.

It’s easy to assume that rising fuel prices are the result of global conflicts. Some argue that the U.S. needs to drill more oil to bring prices down. However, the U.S. already leads the world in oil production, generating more than 14.8 billion barrels per day compared to Saudi Arabia’s 12.4 billion and Russia’s 11.3 billion.

Others point to soaring profits that oil companies enjoy while consumers worry about how they will fill their gas tanks. These critics often claim that oil companies are taking advantage of the situation and gouging customers to earn more money during a crisis. What is missed in this zeitgeist analysis is the years of loss-making that many energy companies report when oil prices are much lower.

Global Conflict

Political strife across the globe might also contribute to recession concerns. Sanctions against Russia for invading Ukraine have forced many European countries to decrease their reliance on fossil fuels from Russia. Sanctions might have also contributed to higher prices in the U.S. and other countries.

Additionally, many countries worry that Russia has plans beyond invading Ukraine. What if it sets its sights on Poland? That would almost certainly lead to a military response from NATO allies. Invading Finland wouldn’t necessarily provoke a response, but it’s difficult to imagine that Europe and the U.S. would tolerate two military aggressions from Russia in such a short period.

Concern and Hope for the Future

It’s more than a little amazing that the world has avoided a major recession during the COVID-19 pandemic. There’s a reasonable chance that all of the measures used to prevent a recession will contribute to economic problems in the coming months and years.