In the spring of 2022, the US economy went through an abrupt shift as consumer spending moved from goods to services. Travel boomed. Retailers slumped. Warehouses overflowed with inventory no one wanted to buy, and factories and the freight industry went through a recessionary adjustment.
Last week we got data suggesting that this adjustment has ended. Our long national nightmare of consumers pulling back on “buying stuff” is over. On top of increased residential construction and a resilient labor market, it’s another reason to believe that, far from a recession, economic growth should pick up over the next couple of quarters, raising the odds that inflation will once again accelerate in 2024.
No consumption category felt the impact of the goods-to-services spending shifts more than outdoor grills. Grill sales slumped in 2022 in large part because so many would-be buyers preponed their purchases during the pandemic summers of 2020 and 2021. Traeger Inc., maker of “outdoor cooking systems,” took advantage of the buying craze to launch an initial public offering in 2021, only to see its stock crash 90% from its peak by the end of the following year. Yet, Chief Executive Officer Jeremy Andrus said on an earnings call last week that the company had seen a “continued stabilization in sell-through trends.” He indicated that the inventory destocking pressures Traeger had faced may be nearing an end. The stock surged 42% the following day and is up around 100% year-to-date.
Home furnishings company Ethan Allen Interiors Inc. saw its stock jump after reporting better-than-expected profit margins. The company said its order backlog remains above 2019 levels, suggesting that — similar to homebuilders — it’s benefiting from a more-normalized selling environment than many predicted last autumn when interest rates were surging. Online household goods retailer Wayfair Inc. also reported good news, noting that "the outdoor shopping season picked up rapidly" toward the latter part of the quarter. Its stock is now up close to 150% year-to-date.
Goods spending has picked up for three reasons. First, for about a year now, workers’ incomes have outpaced inflation, giving them the ability to buy more. Some of that, not surprisingly, has gone toward buying “stuff.” Second, the big deceleration in inflation we've gotten over the past year has been from goods rather than services. Energy costs for consumers have fallen 16.7% in that period. Food inflation has been near zero over the last four months after peaking at over 10%. Once food and energy are stripped out, goods inflation has been below 2% over the past year. Stronger incomes and stable prices are a recipe for more consumption.
And third, it’s now almost 18 months since consumers pulled back from buying items like grills and home furnishings. Enough time has passed that there's room for growth. We may never see sales volumes of grills and mini-fridges approach pandemic levels again, but it's not surprising that trends in the summer of 2023 look better than they did in the summer of 2022.
Inflation-adjusted spending growth on goods at 3.1% year-to-date has actually outpaced real spending growth on services at 1.4% as consumers have finally caught up on their travel plans and are using their growing paychecks to once again buy physical goods. That raises the possibility that goods inflation, which is currently dormant after having surged during the pandemic, could spike back up in coming quarters.
Companies in the business of shipping and selling goods appear to be taking notice, with rail traffic showing some strength in recent weeks during a seasonally weak time of the year. Another burgeoning sign of costs pressures ahead is the run-up in the Bloomberg Commodity Index, which bottomed at the end of May. Oil prices are flirting with their highest levels since autumn after climbing for six straight weeks.
The concern is that such economic strength if sustained, will mean higher inflation towards the end of the year and into 2024.
Don’t expect all this to start showing up in the inflation data immediately. The Consumer Price Index will reflect recent declines in used automobile prices and a cooling in shelter inflation for a few months to come. Still, a pickup in economic growth being driven increasingly by the goods sector and an unemployment rate that remains near 50-year lows suggests the risk of re-accelerating inflation is rising. This re-heating scenario has replaced recession risk as the biggest concern investors should have.
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