Retailers in the US Push Big Holiday Discounts to Ease Inventory Avalanche
If last year’s holiday shopping season was characterized by empty store shelves and a race to meet demand in a healthy US economy, very different concerns have emerged just 12 months later: overabundance and sinking sales.
American retailers are sitting on so much inventory that brands — particularly for apparel and housewares — have resorted to listing their goods on resale websites, hosting sample sales, giving stuff to employees, offering deep discounts and even throwing goods away. (…)
The overhang is leading to canceled orders, a sharp slowdown in global trade growth and stagnating factory activity.
(…) analysts and warehouse operators say it will likely take most of next year to wring out the excesses. (…)
“Even just in the past three days, we’ve seen some of the biggest or most valuable brands in the world contact us for help with excess inventory,” Kaplan said. “It’s a full tidal wave at this point. We need the customer to be spending, and until that happens, the product’s not going to move.”
FYI, the Chase card spending tracker 9through Oct. 31) is pointing to a 0.6% drop in MoM Control sales in October. Nominal sales are clearly weak since last March.
(…) Part of the reason why the excess savings have not had a larger or longer-lasting impact on aggregate demand is because of how they are distributed across the income brackets. In dollar terms, the largest portion of those excess savings has accrued to the highest income quartile, as the chart below shows. As a rule, the higher your income, the smaller is the proportion of it that you spend: the rest you save.
And something similar is generally observed when it comes to ‘windfall’ shocks to income, like the government transfers. So, on the face of it, the more that excess savings are accrued by the higher income groups out of the windfall transfers that occurred during the pandemic, the lower the marginal propensity to consume you would expect to see.
However, the story is actually more nuanced than that. The excess savings accrued by the richest quartile were not in fact built up thanks to the transfers, which were small relative to their income. Instead they were accrued thanks to reductions in outgoings among that income group during the pandemic. In other words, they spent less than usual, probably because many opportunities to spend (such as on luxury travel and tourism or hospitality) were not available.
So the richest quartile have built up savings primarily because they were not able to spend as much as they might have wished during the pandemic, and/or because they chose to accrue higher precautionary savings during that period. Either way, the impact on aggregate demand now that the pandemic appears to be receding might be different than if those savings had come from fiscal transfers.
It is hard to be sure how much of those excess savings will now be spent, or over what period. The normal assumption in most macroeconomic models is that in the long run, consumer spending increases in proportion with income – so a 10% increase in income will lead to a 10% increase in consumption. Note that this long-run relationship can hold no matter what the marginal propensity to consume. (…)
What happens if the highest income group accrues an extra $1 trillion in savings? In the long run they will increase their spending by the same proportion as that excess saving is a proportion of their income, right? At its peak, the $1 trillion accrued by the highest income quartile of the US population accounted for roughly 12% of their annual household income.
So consumer spending should go up by 12% as well, in that income group, right? Well, no ‒ not necessarily.
The difficulty is that the excess saving is a one-off, a windfall, not a permanent increase in income. So the rational thing to do is to consider how much ‘lifetime’ income has increased, by spreading that windfall across all one’s future income. Then the percentage impact on consumption in each year would be tiny.
It turns out in most studies that consumers do not behave ‘rationally’ in that way. They tend to be much more myopic – focusing on the short term, with a bigger impact on consumption from windfall shocks to income than lifetime smoothing would imply.
So at one end of the spectrum you have a 1:1 percentage impact on annual consumption in the first year after the shock to savings (implying the top quartile spend an additional $570 billion or so in the first year); at the other end a tiny marginal increment proportional to the effect on lifetime income.
Fathom’s baseline assumption is in the middle: half the ‘excess’ saving will be treated as income in the first year across all income groups: more of that will be spent at the lower end of the income spectrum, less at the higher end.
Zooming in on the highest income quartile specifically, Fathom’s baseline would be consistent with around $300 billion of the $1 trillion in excess savings for that group being spent within the first year after the shock to savings – about half of that income group’s usual marginal propensity to consume out of income.
But the story does not end there. Because, over the same period, there has been another shock affecting that group: the shock to financial wealth. (…) some $7.1 trillion (around 18%) has been wiped off the value of the S&P 500 since the start of 2022, thanks to the war in Ukraine, the slowdown in growth and the increase in interest rates that have occurred over the same period.
Fathom’s proprietary macroeconomic model, GESAM, suggests that a 17% reduction in financial wealth would result in a 1.3% reduction in consumer spending, all else the same, with the bulk of that change occurring within the first four years. But, since the bulk of financial wealth is owned by the highest income quartile, the impact on their spending must be larger than for other income groups – perhaps two or three times as large (our model is silent on this question).
Therefore it is reasonable to assume that a hit to financial wealth like we have seen will tend to reduce consumer spending by the highest income quartile by around 2% to 3% in the first year after the shock. It turns out that 2% to 3% of consumption of the highest income quartile is around $200 to $300 billion a year.
In other words, the net impact of excess savings and a reduction in financial wealth for the highest income quartile in the US is probably close to zero. We should not look for much support for growth from that part of the population. To the extent that excess savings will support consumer spending in the US, that support is likely to come from the third and second income quartiles, where the dollar quantities are large enough to matter and the hit to financial wealth is probably smaller.
High-frequency indicators such as Google mobility trackers support this assessment, in the US and elsewhere. Mobility around retail and recreation venues is still some 10% below its pre-pandemic level in both the US and the UK, while it is close to its prepandemic level in Germany, France and Italy and a little above that level in Brazil. These are among the activities that the higher income groups held back on during the pandemic, and they are now flatlining below the pre-pandemic level, with no sign of imminent recovery: if anything, rather the reverse.
All of this suggests to us that without substantial support from macroeconomic policy, a recession in the US is now looking increasingly likely. And that support is unlikely to be forthcoming, with the Fed signalling further rate hikes to come.
Monetary Policy Stance Is Tighter than Federal Funds Rate
From the San Francisco Fed, Monday:
The Federal Reserve’s use of forward guidance and balance sheet policy means that monetary policy consists of more than changing the federal funds rate target. A proxy federal funds rate that incorporates data from financial markets can help assess the broader stance of monetary policy. This proxy measure shows that, since late 2021, monetary policy has been substantially tighter than the federal funds rate indicates. Tightening financial conditions are similar to what would be expected if the funds rate had exceeded 5¼% by September 2022 as opposed to the actual rate of 3-3¼%. (…)
When only one tool was being used before the 2000s, the stance of policy was directly related to the federal funds rate. However, the use of additional tools and increased policy transparency by FOMC participants has made it more complicated to measure the stance of policy. For example, in 2021–22, the FOMC lifted the funds rate target off zero and began a historically rapid pace of rate increases. It also slowed and eventually began reversing its balance sheet expansion. During this time, the FOMC provided guidance about its plans through its statements and public remarks by officials. In such an environment, the level of the federal funds rate target does not adequately convey the overall stance of monetary policy. (…)
When the FOMC uses additional tools, such as forward guidance or changes in the balance sheet, these policy actions affect financial conditions, which the proxy rate translates into an analogous level of the federal funds rate. In other words, our measure interprets changes in financial conditions as if these conditions were driven solely by the funds rate.
The proxy measure suggests that the stance of monetary policy has recently been substantially tighter than the federal funds rate alone would indicate. Whereas the FOMC moved the target funds rate above its zero lower bound in March 2022, the proxy measure had already moved positive in November 2021 and increased quickly thereafter. By September 2022, the proxy rate was above 5¼%, much higher than the actual funds rate. This difference reflects additional tightening from using forward guidance and the balance sheet. Accounting for the broader stance of policy and comparing the proxy rate to simple rules suggests U.S. monetary policy tightened sooner and more sharply than has been generally recognized.
Effective federal funds rate and proxy rate, 1976–2022
Source: Federal Reserve Board of Governors, Freddie Mac, The Bond Buyer, Moody’s, and authors’ calculations.
China Producer Prices in Deflation for First Time Since 2020
PPI declines 1.3% y/y in Oct. compared to 1.5% expected drop
CPI rises 2.1%, while core inflation is unchanged at 0.6%
(…) “China’s core CPI is now the lowest among major economies and is even lower than Japan’s,” said Liu Peiqian, chief China economist at NatWest Group Plc., adding that the subdued recovery in domestic demand was contributing to deflationary pressures. (…)
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Lockdowns Spread as New Omicron Variants Evade China’s Zero-Covid Net China’s manufacturing hub of Guangzhou locked down more of the city as the country struggles to contain the worst coronavirus outbreak in more than six months.
China Expands Financing Tool to Support Ailing Developers
The National Association of Financial Market Institutional Investors widened the bond financing program to about 250 billion yuan ($34.5 billion) for private companies including developers, the regulator said in a statement, without specifying the previous size of the quota. The ways to support such financing include bond guarantees, credit enhancement and bond purchases, it said, adding that the move is part of efforts to stabilize the economy and could be expanded further if needed. (…)
The program could help the private sector, but might not be sufficient to completely address the issues real estate companies are facing, said Lu Ting, chief China economist at Nomura Holdings Inc.
“Developers still face mounting bond repayment pressures in coming months,” Lu said. “We expect no major policy changes in the property sector until at least March 2023.”
While the above slow mo crash is being gradually rescued by the state, this other slow moving accident is gaining speed. Who’s going to rescue it?
Cryptocurrencies fall after FTX-Binance turmoil spooks investors
Cryptocurrencies saw a second day of sharp declines on Wednesday, as investors continued to fret about the stability of the sector and the financial health of major exchange FTX despite plans for a rescue deal from bigger rival Binance.
Crypto giant Binance signed a nonbinding agreement on Tuesday to buy FTX’s non-U.S. unit to help cover a “liquidity crunch” at the rival exchange.
The proposed deal between high-profile rivals followed week-long speculation about FTX’s financial health that snowballed into $6 billion of withdrawals in the 72 hours before Tuesday’s deal, raising questions about the solvency of one of the world’s largest crypto exchanges. (…)
“… the whole thing still looks like a dark hole. We are not sure how contagious this could be, but I believe institutions need to show their proof of reserves ASAP. Confidence does not recover before that,” Zeng said. (…)
Binance is also under investigation by the U.S. Justice Department for possible violations of money-laundering rules, Reuters reported last week. That is one of a series of investigations this year into Binance’s troubled history with financial regulatory compliance. (…)
- “I think if this bear market has proven anything, it’s that the emperor has no clothes,” Marc Weinstein, partner at crypto venture firm Mechanism Capital Ventures, said. “Even seasoned institutional investors can get swept away investing in hot deals at unreasonable valuations in a bull market.” (Bloomberg)
- Bloomberg News’s Tom Maloney reports that the Softbank Vision Fund, Singapore’s wealth fund Temasek and Ontario Teachers’ Pension Plan sunk $400 million into the exchange at a $32 billion valuation in January. [Also Tiger Global]
- As recently as Monday morning, SBF sought to reassure customers in a tweet, saying, “FTX is fine. Assets are fine.” (Axios)
Recall that FTX last spring acted as the backstop for failing crypto firms. Bloomberg’s Joe Weisenthal:
FTX on the other hand was perceived as one of the highest quality exchanges, with some of the most professional practices. Sam [Bankman-Fried, “SBF”] was the face of crypto in DC. And of course a major donor to politics and non-profits. So for his empire to implode is similar to a safe asset imploding.
The industry has been raw and mistrustful ever since the collapse of entities like Luna, Celsius and 3AC. This is like all those, but even more damaging.
More damaging? Stay tuned…
- Sam Bankman-Fried’s $16 billion fortune is eviscerated in days
- BTW, ADG recalls that, in March 2021, FTX signed a 19 year, $135 million deal for naming rights to the arena hosting the National Basketball Association’s Miami Heat. No slam dunk.