Some economists may rely upon qualifiers, but Gherzi Textil Organisation’s partner Bob Antoshak argues that despite rising levels of employment, the US is already in a technical state of recession and the rest of the world is following suit.
What a mess. For the past two quarters, US GDP has declined and the same may be the case in Europe, although it hasn’t yet been reported in the statistics.
Nevertheless, we’re slouching towards an economic world recession, if not a slowdown. The International Monetary Fund (IMF) seems to agree as it just lowered its outlook for global economic growth.
But at the moment, it’s a confusing picture. For instance, it’s rare to see declining GDP with rising employment. Instead, GDP fell by 1.6% and 0.9% during the first and second quarters of 2022.
In contrast, more than 500,000 jobs were filled in June, with unemployment falling to just 3.5%. Good news on the job front, but we’re left to ponder – why? The economy has contracted for the year’s first half, usually equating to a smaller jobs market and higher unemployment.
This is hard to explain. But ever since Covid made its way through the global population, many elements of the global economy appear to have fallen out of sync. A prime example of this is buckled supply chains. As a result, supply and demand seem out of whack, along with the business mechanisms necessary for supply to successfully meet demand.
Nonetheless, despite all the doomsayers, it may be too early to say a recession has descended upon us.
Strong employment but weak consumer confidence
Suffice to say, we may be on the cusp of a global recession, but we still need more time to assess what’s truly going on. Moreover, other measures in the US economy, which is still the world’s largest consumer market, defy the gravity of declining GDP. Take personal consumption, for example – this key measure of economic activity was up 1.1% in June, which is hard to explain when the overall economy is considered.
That’s fine and good until we consider consumer confidence. It stinks. Despite improvement in the employment sector (oh, and wages were up 5.2% in July), consumer sentiment, as measured by the University of Michigan, plummeted. Its consumer sentiment index stood at 51.5 in July, the lowest measure since 2009, and a decline of 36.6% compared to July 2021. But there’s another disconnect to consider – and that’s inflation.
It was just announced that the US consumer price index eased to an annualised rate of 8.5% in July, as fuel prices pulled back from June levels. However, apparel prices remained unchanged in July compared to June, as annualised prices increased by 5.1%. Perhaps all the wage and employment gains have been undermined by rising inflation. It’s insidious; frustrating for central bankers and politicians alike.
And then there’s the average Joe left to fend off higher prices for everything from food to fuel to clothing.
The US’ central bank (the Federal Reserve), raised federal fund rates in late July by 0.75% to a range of 2.2%-2.5% and will likely raise rates again in September by another 0.75%. These increases directly impact the cost of consumer credit. What’s more, there could be more increases down the road.
Despite the uneven nature of economic reports these days, members of the Federal Reserve have said that even more work needs to be done to tame inflation. So yeah, the economy may have to flatline under sharply higher interest rates to tame inflation.
The importance of retail amidst a world recession
Retailers hold the key to understanding how a recession will unfold — or not. With consumer purchasing making up so much of the activity in developed world economies, retailers are the first touch point to current and future demand for products and services. Yet, US retail apparel sales fell nearly 5% from May to June, according to the US Census Bureau.
Indeed, on the surface, this contradicts the top-line personal consumption numbers stated above. Still, it also suggests that although retail consumption remains positive, what consumers prefer to spend the inflation-weakened dollars on are products other than apparel.
Something else to consider is the strong dollar. When gaining in value relative to other currencies, US imports of products fall in value. Which equates to lower prices for consumers. Add in the high inventories already carried by clothing retailers, and we’re setting up for quite a holiday sales season.
Moreover, foreign investors are pulling their money out of developing countries in favour of safer havens because of the strong dollar and global uncertainty. The crisis in Sri Lanka is a prime example. As investors bailed on the island nation, political and social turmoil ensued.
Nowhere can the uncertainty be most felt than at retail. With high inventories, erratic demand, and rising costs, retailers are the poster boy for what ails the economy today. There’s a lack of direction. So what to do when discounting old inventory doesn’t work? I think I hear an old tried-and-true model creaking.
And the latest financial results from a monster retailer like Walmart underscore the problem. They have tons of inventory on hand and not enough demand from their customers to offload the products. As a result, in its most recent investor call, the retailer reported declining margins, weaker sales, and overall poorer financial results. And others will report similar financial results too.
Hence, retailers are caught in a squeeze between high inventories that may prove challenging to sell to skittish consumers. For me this all signals a weakening economy.
What does the start of a world recession mean for apparel?
It’s hard for retailers to trust traditional supply chain paradigms after getting burnt during the pandemic. So their solution: load up on even more inventory now. But this is piling more clothing into warehouses that may never be able to empty. Moreover, consumers continue to shy away from soft goods, like apparel — no matter the price offered by the retailer.
High apparel inventories remain a problem. This is especially true when consumers now buy more appliances, tech products, and services, like air travel and restaurants, than they did clothing during the pandemic. Consequently, this holiday sales season may turn ugly, like the past few years haven’t been tough enough.
Geopolitical uncertainties
The war in Ukraine, which continues unabated, is lost in the economic news — unless there’s talk of oil and gas shipments or grain exports. The resumption of grain exports from Ukraine is a bright spot in an otherwise gloomy picture. It eases concerns over global food shortages with Ukrainian shipments previously blockaded at ports.
In case you’ve lost track of the war, it’s ongoing and painful for many people. As the tally of casualties rises every day, so does global uncertainty. Hear me out on this: the combatants are bombing another nuclear plant. Talk about uncertainty! Need I say more?
As though the war in Ukraine wasn’t enough to deal with, we now have Chinese aggression towards Taiwan. Increasingly it seems the Chinese navy will block the passage of shipping through the well-travelled Taiwan Strait. Further, so-called temporary Chinese military live-fire drills around Taiwan continue longer than initially stated. These military exercises were initiated after speaker of the US House of Representatives, Nancy Pelosi, departed from the island after an unannounced visit as part of a wider Asian countries tour.
However, despite Chinese objections, why Pelosi visited Taiwan in the first place remains a mystery – was it simply part of an Asian tour or was there more to the visit?
Tensions between China and the US are high. Relations haven’t been this bad for many years, which only adds to uncertainty in the global economy. Indeed, Chinese actions around Taiwan look like an embargo of sorts. Of course, it could also be a prelude to invasion. But, equally, it could be an activity to placate Chinese nationalists, and the navy will be recalled. Whatever the true meaning of China’s military manoeuvring, it’s not doing supply chains any good at the moment.
China’s president, Xi Jinping, faces many internal problems. Nevertheless, he may have painted himself into a corner by elevating the Pelosi visit to a serious political matter. Seemingly his only option in response to the visit was to come out swinging from his corner – missiles away.
World recession: turning the ship
There is so much gloom, but the world must find a way of snapping out of this pandemic-induced malaise or risk economic calamity – or even worse.
All of this economic stuff may sound esoteric for some until we consider the impact it is having on our industry. Sales are uneven, while inventories are sky high. The industry is still dealing with supply chain inefficiencies and supply and demand imbalances.
What’s more, the prospect of stagflation looms large, and US employment may suffer if the Fed is too aggressive by causing a recession. It’s a tricky balancing act. A 2% target by the Federal Reserve for inflation is a pipe dream when rates currently top 9%.
We live in precarious times, and a confluence of political and economic events leaves us in rough waters facing an uncertain future. Let’s hope we can somehow turn this ship around before we run aground.
Last month Antoshak said the cotton market had already called the next recession and explained when the world is in recession low prices for fashion won’t matter as much as demand for products and services will dry up except for essentials.
