Inflation and recession fears squeeze some industries more than others

Inflation and recession fears squeeze some industries more than others

A woman pushes a shopping cart down the grocery aisle at Target in Annapolis, Maryland on May 16, 2022, as Americans brace for summer sticker shock as inflation continues to soar.

People still seem willing to shell out for travel, the movies and a drink or two, even as soaring prices and fears of a recession set them back in other areas.

How people spend their money is changing as the economy slows and inflation pushes up prices everywhere, including at gas stations, grocery stores and luxury retail stores. The housing market, for example, is already feeling the effects. Other industries have long been considered recession proof and may even experience a bump as people start to head out again after hunkering down during the pandemic.

Yet buyers around the world feel pressured. In May, a measure of inflation that tracks the prices of a wide range of goods and services jumped 8.6% from a year ago, the biggest jump since 1981. Consumer optimism about their finances and general sentiment in the economy fell to 50.2% in June, its lowest level on record, according to the monthly index from the University of Michigan.

As gas and food prices soar, Brigette Engler, a New York-based artist, said she’s been driving to her second home upstate less often and cutting back on her meals at the restaurant.

“Twenty dollars seems extravagant at this point for lunch,” she said.

Here’s a look at how different sectors are faring in the downturn in the economy.

Movies, experiences that last

Concerts, movies, travel and other experiences that people missed during the height of the pandemic are among the industries enjoying strong demand.

Live Nation Entertainment, which owns concert venues and Ticketmaster, has yet to see people’s interest in attending concerts dwindle, CEO Joe Berchtold said at the William Blair Growth Stock conference earlier this month. this.

In theaters, blockbusters like “Jurassic World: Dominion” and “Top Gun: Maverick” also saw strong box office sales. The film industry has long been considered “recession-proof”, as people who forgo more expensive vacations or recurring Netflix subscriptions can often still afford movie tickets to get away from it all. for a few hours.

Alcohol is another category that is generally protected against economic downturns, and people are going out to bars again after drinking more at home during the early days of the pandemic. Even as brewers, distillers and winemakers raise prices, companies are betting that people are willing to pay more for higher quality alcohol.

“Consumers continue to trade up, not down,” Molson Coors Beverage CEO Gavin Hattersley said during the company’s earnings call in early May. It may seem counterintuitive, but he said the trend is consistent with recent economic downturns.

Alcohol sales have also been protected in part because prices have not risen as quickly as the prices of other goods. In May, alcohol prices rose about 4% from a year ago, compared to the 8.6% jump in the overall consumer price index.

Major airlines like Delta, American and United are also forecasting a return to profitability thanks to an increase in travel demand. Consumers have largely digested higher fares, helping airlines cover soaring fuel costs and other expenses, although domestic bookings have fallen in the past two months.

It’s unclear if the race for the skies will continue after the spring and summer travel rushes. Business travel typically resumes in the fall, but airlines may not be able to count on that as some companies look for ways to cut spending and even announce layoffs.

People’s desire to get out and socialize again is also boosting products like lipstick and high heels that have been shelved during the pandemic. This has recently helped sales at retailers such as Macy’s and Ulta Beauty, which last month raised their full-year profit forecasts.

Luxury brands such as Chanel and Gucci are also proving more resilient, with wealthier Americans not being as affected by rising prices in recent months. Their challenges have been more concentrated in China lately, where pandemic restrictions persist.

But the fear is that this dynamic will change quickly and the short-term gains for these retailers will evaporate. More than eight in 10 US consumers plan to make changes to reduce spending in the next three to six months, according to a survey by NPD Group, a consumer research firm.

“There is a tug of war between the consumer’s desire to buy what they want and the need to make concessions based on the higher prices hitting their wallet,” said Marshal Cohen, chief industry adviser. of retail for NPD.

Houses, expensive items in a hurry

The once scorching housing market is among those clearly suffering from the downturn.

Rising Interest rates have dampened mortgage demand, which is now roughly half of what it was a year ago. Homebuilder sentiment fell to its lowest level in two years after falling for six straight months. Property companies Redfin and Compass both announced layoffs earlier this week.

“With May demand 17% lower than expected, we don’t have enough work for our agents and support staff,” Redfin CEO Glenn Kelman wrote in an email to employees posted earlier. later on the company’s website.

For the retail sector in general, Commerce Department data also showed a startling 0.3% drop overall in May from the previous month. This included declines at online retailers and various in-store retailers such as florists and office suppliers.

And while demand for new and used cars remains strong, auto industry executives are starting to see signs of potential trouble. With the cost of new and used vehicles rising by double digits over the past year, car and other motor vehicle dealerships saw sales fall 4% in May from the previous month, according to the US Department of Commerce.

Ford Motor Chief Financial Officer John Lawler said this week that auto loan delinquencies were also starting to rise. While the increase could signal tough times ahead, he said it was not yet a concern as delinquencies were low.

“It looks like we’re reverting more to the mean,” Lawler told a Deutsche Bank conference.

The restaurant industry is also seeing signs of potential problems, although how restaurants are affected may vary.

Fast food chains have also traditionally weathered economic downturns better, as they are more affordable and entice diners with promotional offers. Some restaurant companies are also betting that people will continue to eat out as long as grocery prices rise faster.

The cost of out-of-home food rose 7.4% in the 12 months to May, but in-home food prices soared even faster, climbing 11.9%, according to the Bureau of Labor Statistics . Restaurant Brands International CEO Jose Cil and Wendy CEO Todd Penegor are among the fast food executives who have pointed to the gap as a benefit to the industry.

But McDonald’s CEO Chris Kempczinski said in early May that low-income consumers had started ordering cheaper items or reducing the size of their orders. As the largest restaurant chain in the United States by sales, it is often seen as a bellwether for the industry.

On top of that, traffic across the entire restaurant industry slowed to its lowest point of the year in the first week of June, according to market research firm Black Box. Intelligence. This was after the number of visits also slowed in May, although sales increased by 0.7% due to an increase in spending per visit.

Barclays analyst Jeffrey Bernstein also said in a research note Friday that restaurants are accelerating discounts, a sign they expect same-store sales growth to slow. Among the chains that have introduced new offers to attract diners are Domino’s Pizza, which offers half-price pizzas, and Wendy’s, which has reduced its Biggie Bag meal to $5.

Among those struggling to adjust to a change in shopper behavior are mass retailers like Target and Walmart, which have released cautious forecasts for the year ahead.

Target warned investors earlier this month that its fiscal second quarter earnings will suffer as it cuts people bought during the pandemic but no longer want, such as small appliances and electronics. The big-box retailer is trying to make room on its shelves for products currently in demand: beauty products, household essentials and back-to-school supplies.

CEO Brian Cornell told CNBC that the company’s stores and website are still seeing strong traffic and “a very resilient customer” overall, despite their changing shopping preferences. Rival Walmart also slashed less sought-after items like clothing, although the retail giant said it was gaining share in groceries as shoppers look to save.