Gasoline prices recently have fallen about 60 cents a gallon from their highs in June. It has been one of the few respites in 2022 for the consumer, and hopefully a positive for the harried retail sector.
It is hard to remember a time in this country where the average consumer was under so much pressure, especially outside a major recession. The average consumer has lost more than 4% of their buying power over the past 12 months and consumer sentiment is at historic lows.
Things are likely to get worse before they get better. The Federal Reserve is likely to hike rates by another 75 basis points this week even as the economy is clearly slowing. Inflation is likely to remain elevated for some times. The average rent rose in the high teens on a percentage basis over the last year and housing affordability hasn't been this bad since right before the great financial crisis some 15 years ago. The shelter component is the largest part of the monthly Consumer Price Index reading and there is always a lag in how these increases get filtered through to the report, which will help keep CPI high even as other prices such as those for energy are moderating. That situation is likely to keep the central bank's foot to the economic brake.
In addition, job growth is going to slow in the coming months; the only question is by how much. I think we will see a substantial deceleration if not an outright reversal. Even a mild recession could bump up the unemployment rate by two percentage points. We also need to keep in mind that the current unemployment rate of 3.6% is not quite what it appears to be. If we had the same job participation rate the country was experiencing right before the pandemic and its associated lockdowns, the true unemployment rate would be 5.5%.
A flailing consumer is hardly good news for a challenged retail sector that already is dealing with supply chain issues, a labor shortage and surging import prices, not to mention large increases in freight and shipping costs. Some stores in certain states are also dealing with rampant shoplifting as well as rising crime/homelessness and increased unionization efforts. Starbucks (SBUX) recently announced it was closing 16 stores in its network, with more closings likely to be announced for some of the above reasons.
It is all shaping up to be lousy holiday season for the retail sector as companies scramble to adjust their inventory levels in light of ebbing consumer demand. I can see some real Black Friday specials by numerous well-known retailers this Christmas season. While I envision a tough couple quarters for retailers and I remain very underweight this part of the market, there will be a time to back up the truck and buy retail stocks. I do believe the coming recession should be short and mild and the sector should bounce back sometime in early 2023. We are just not to that buying season yet.