Macroeconomic impulses ripple through the consumer products and retail sectors with implications for sector business leaders.
US macroeconomic backdrop
Our outlook for the US economy has improved materially, as unique post-pandemic economic dynamics appear to be making a soft-landing scenario more plausible. The labor market is gently cooling, with the unemployment rate still sitting near all-time lows while inflation has rapidly declined. With real wage growth turning positive, this has led to a gradual slowdown in consumer spending despite ongoing headwinds from elevated prices and interest rates and tightening credit conditions. The latest GDP figures showed the economy continued to grow at a healthy clip in Q2, and high-frequency data confirms a recession isn’t on the near-term horizon. Against this backdrop, we have further reduced our probability of a recession over the next 12 months to 40%. Still, we continue to see downside risks to growth from tighter credit conditions, the restart of student loan payments, uncertainty regarding the lagged economic impact of monetary policy and a weak global economic backdrop.
State of the sector
The strong July retail sales points towards consumers’ willingness to continue spending. However, amid elevated prices and interest rates, consumers are increasingly acting with financial prudence and reshuffling their spending month to month. With employment expected to moderate further, the disposable income tailwind from slower inflation will be largely offset by slower income growth. As such, we believe a downshift in consumer spending is poised to materialize in the latter part of the year, as the buffer from excess savings shrinks, student loan repayments restart, credit conditions remain tight and household finances deteriorate. We anticipate consumer spending will advance 2.3% in 2023 and register muted growth of 0.9% in 2024.
Inflation
The latest Consumer Price Index (CPI) data confirmed that a disinflationary environment remains in place. Headline inflation ticked up 0.2 percentage points (ppt) to 3.2% year over year (y/y) as base effects turned less favorable and core inflation fell 0.1ppt to 4.7% y/y. We see headline inflation easing to 3.0% y/y in December, while core CPI inflation is likely to ease toward 3.8% y/y by year-end.
Talent
The labor market continues to show signs of rebalancing, with cooler labor demand leading to a gradual moderation in wage growth. The economy added 187k jobs in July (fewer than anticipated), and job openings fell to their lowest level in over two years in June. While layoffs remain low, job creation has become significantly less broad-based as businesses take a more conservative approach toward hiring and pay. We continue to expect further hiring freezes and strategic resizing decisions along with some continued moderation in nominal wage growth in the coming months, but we don’t anticipate a severe employment pullback. We see the unemployment rate rising from 3.5% toward 3.8% by year-end and around 4.3% by the end of 2024.
Globalization, supply and channel
Supply chain bottlenecks are clearing. Imports from China continue to decline as the US and other Western economies pursue “de-risking” trade strategies, i.e., a reduction in dependency on Chinese goods in addition to implementing restrictions on China’s access to advanced technology. E-commerce has maintained the large share of retail spend gained during the pandemic, now nearing 25% of total retail spend, highlighting the criticality of an omnichannel approach. Wholesalers and retailers alike grew inventories in 2021–22. This behavior has cooled, as inventory levels are now moving sideways and contracting in some segments.
Financial conditions and transaction activity
The Fed raised the federal funds rate range by 25 basis points to 5.25%–5.50% at the July Federal Open Market Committee meeting, more than likely marking the end of a historic tightening cycle. Given our outlook for continued disinflation and softer economic momentum, we remain of the view that the Fed will keep the federal funds rate unchanged throughout the remainder of the year. The restrictive monetary policy by the Federal Reserve and tight credit conditions act to hamstring capital access and borrowing for firms. This environment has also impacted investment and M&A activity, including private equity, which has seen material slowdown across all sectors and industries.
Dan Moody of Ernst & Young LLP contributed to this article.
Consumer Products & Retail
The retail and consumer goods companies that lead on addressing disruptions will shape our future industry.
The views expressed by the author are his own and not necessarily those of Ernst & Young LLP or other members of the global EY organization.
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