Closure of factories. A wave of job losses and few open positions. Huge financial losses affecting most industries.
So what is going on and where could we be heading? The answer to both questions could be found in the country’s warehouses.
Breakdown: US GDP in the second quarter fell at an annualized rate of 0.9%, according to the Commerce Department’s first reading released on Thursday. This followed a contraction of 1.6% in the first three months of the year.
The data fueled debate over whether the United States is already heading into a recession, which economists have warned is a risk as the Federal Reserve raises interest rates and inflation curbs consumer spending.
Fed Chairman Jerome Powell, for one, doesn’t think that time has come, at least not yet.
“I don’t think the United States is currently in a recession,” Powell said earlier this week. “There are too many areas of the economy that are doing too well.”
But GDP doesn’t just turn negative on its own, and Thursday’s data contains a useful guide to understanding a complex economic moment.
Note: Inventories, or a company’s assets that have not yet been sold, played an important role.
Companies stocked up on many items late last year as they tried to sidestep supply chain problems and ensure they could meet the rebound in demand.
But in recent months, they have realized they have too much stuff, especially at an uncertain time for manufacturers and buyers, and are hesitant to place new orders.
The subsequent slowdown in stockpiling contributed to much of the contraction between April and June, wiping two percentage points from economic output.
Why it matters: Some economists and investors think that because growth picked up late in 2021, activity in the first half of 2022 looks artificially low.
“The fourth quarter, to me, was a little bloated,” said Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services. “Everybody was just hoarding stuff.”
But that doesn’t mean inventory levels should be ignored. Indeed, they contain useful clues about how quickly the US economy could slow down from here.
Ed Cole, managing director of discretionary investments at Man Group, told me there are two main reasons why he is watching closely how fast US inventories are growing “as an indicator of where we are in the cycle “.
- If customers buy fewer products, companies will not place new orders, which will affect factory production.
- If companies are forced to get rid of unwanted inventory at deep discounts, it will put pressure on revenues and profits.
“Recent warnings from major retailers have demonstrated this effect quite clearly,” he added.
See here: This week, Walmart ( WMT ) cut its profit outlook, warning that customers are changing their shopping habits. This requires markdowns to eliminate excess inventory of products such as clothing. It is not the only company with this problem. American Outdoor Brands (AOBC) recently told analysts that “rapidly rising inflation and interest rates … have served to increase inventory levels.” Hasbro ( HAS ) also said it had “higher-than-typical inventory levels” for this time of year, while stressing that its stock is of “extremely high quality.”
Amazon dodges the tech crash
Amazon ( AMZN ) is going strong even as other Big Tech companies stumble.
The e-commerce giant on Thursday reported net sales of more than $121 billion between April and June, up 7% from the same quarter last year and beating Wall Street estimates.
Investor outlook: Amazon shares rose 12% in premarket trading as investors shrugged off the company’s $2 billion loss, which it attributed in part to its investment in the manufacturer of Rivian electric trucks.
Instead, the focus is on the company’s guidance for its current quarter, which ends in September. Amazon expects net sales of $125 billion to $130 billion, a jump of up to 17% from last year.
“Big Tech has been a mixed bag this earnings season, but Amazon showed that the strong can survive even the toughest environments,” Hargreaves Lansdown analyst Laura Hoy told clients.
Meanwhile, Apple ( AAPL ) looked less impressive. The world’s most valuable tech company posted revenue of $83 billion, up just 2% from last year and a marked slowdown from the blistering growth it saw in 2021. Profits fell nearly 11%.
Still, Apple beat estimates, sending shares up more than 2% in premarket trading.
My thought bubble: Even corporate giants are not immune to the pressure of an economic downturn, but they are better insulated.
Having a cloud services business definitely helps. It was a bright spot for Microsoft ( MSFT ) and Google ( GOOGL ), with Amazon Web Services posting a $5.7 billion profit. The unit’s revenue nearly reached $20 billion, a 33% increase over the same period last year.
China’s leaders have been silent on economic targets
China’s top leadership has been muted on the growth targets it had set for the year, as the world’s second-largest economy battles a largely self-inflicted economic slowdown.
Earlier in March, China’s government had said the country would aim for gross domestic product to grow by around 5.5% this year. It was China’s lowest official economic growth target in three decades. Still, economists have said it looks increasingly out of reach.
See here: Earlier this week, the International Monetary Fund cut its forecast for China’s GDP growth to just 3.3% this year as Covid-19 lockdowns and an industry crisis real estate weigh its expansion.
Now, the country’s leadership has gone completely silent on growth targets, reports my CNN Business colleague Laura He. At a key meeting of top leaders on Thursday, there was no mention of GDP targets.
According to analysts, this is a sign that the government thinks it may not be able to achieve its goals after all.
“At today’s meeting, policymakers used the new phrase: ‘Strive for the best.'” It means they no longer see 5.5%, or even 5%, as possible for this year,” said Larry Hu, chief China economist at Macquarie Capital.
Until next time
Chevron ( CVX ), Bloomin’ Brands ( BLMN ), ExxonMobil ( XOM ), Newell Brands ( NWL ), and Procter & Gamble ( PG ) report results ahead of the US market open.
Also today: The Personal Consumption Expenditure Price Index arrives at 8:30 a.m. ET. It is the most closely watched measure of inflation by the Federal Reserve.
Next week: July’s US jobs report will be closely scrutinized for evidence that the economy is slowing faster than expected.
– Martha White, Alicia Wallace, Rishi Iyengar and Clare Duffy contributed to the report.