When we focus on food at home and food away from home, price levels in June increased 12.2 percent and 7.7 percent year over year, respectively—levels consumers haven’t experienced since the early 1980s and late 1970s. Meats, poultry, fish, and eggs have increased 11.8 percent year over year—increasing at a decreasing rate since April 2022.  On a month-to-month basis, the metric decreased 0.4 percent from May to June.

There are arguments on both sides of the political spectrum, but it seems like the majority would agree that the supply shocks driven by the pandemic and—most recently—the Russia-Ukraine War are the main factors in why inflation remains so rampant. When the pandemic broke out in 2020, the economy shut down instantaneously. Many consumers were no longer spending on dining out, traveling, entertainment, etc. Consumers began buying more goods as opposed to services—learning how to cook at home, spending money on home improvement, moving to more rural areas, etc. Incomes increased for consumers but spending habits shifted. Supply chains experienced shocks with fixed to lower supplies and dilemmas over workers staying home for a number of reasons including fear over COVID to shifting careers to new industries. As time progressed, the economy reopened, but additional variants continued to affect the supply chains. Many expected the economy to turn back on like a light switch–but it’s been taking time to get back to normal.

On top of supply disruptions caused by COVID, the Russia-Ukraine war only helped in adding fuel to the fire. Energy and grain commodities increased significantly due to the crisis. Additional sanctions by Europe and the United States on Russian energy caused energy prices to rise globally. As a key input in any line of production, a shift in energy could cause significant challenges for producers to keep prices lower for consumers.

Are we in a recession?

The definition of recession is often a common misconception. For many, recession means two consecutive quarters of negative gross domestic product (GDP) growth – this is regarded as the “textbook” definition. But this is rarely the case. The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) is a committee of academic economists that officially determines where the economy is in the business cycle. Therefore, defining a true recession is more complicated than some would think. A wide variety of metrics are used by the committee to measure the overall health of the economy and the “textbook” definition many have come to know isn’t always true. For example, the COVID recession in 2020 was the shortest recession in our nation’s history, recording only one-quarter of negative GDP growth— a fine example of not following the “textbook” definition.

Currently, the economy has recorded two consecutive negative quarters of GDP growth. When you combine that with inflation at levels not seen in decades, many within the market feel justified that a recession is coming. However, we must consider the following…

1. Jobs market remains strong

From 2018 to February 2020, the average unemployment rate and labor participation rate were 3.8 percent and 63 percent. The average unemployment this year from January to June has been 3.7 percent. During the same time frame, the average labor participation rate was 62.3 percent. Total nonfarm job openings have been above 10 million since July 2021. They have been above 11 million since December 2021. New hires continue to show strong signs as well. In May 2022, total nonfarm new hires increased 6.5 percent from year-ago levels to 6.5 million.

2. Retail sales continue to increase

Despite inflationary pressures, consumers continue to spend. With respect to food services and drinking places, sales in June 2022 increased 13.4 percent year over year to roughly $86.1 billion. From January 2022 to June 2022, sales totaled approximately $494.3 billion – an increase of 22.3 percent when compared to the same time last year. Increased sales indicate consumers are still willing to spend.

3. Personal saving rates

Throughout the pandemic, consumers saved more than ever before – reaching a historical high of 33.8 percent in April 2020. Since March 2021—when the economy reached a personal savings rate of 26.6 percent—the rate has been decreasing. In May 2022 the personal savings rate was 5.4 percent. Despite being under the 2019 average of 7.6 percent, the increased savings from the pandemic have led many to believe that consumers have an extra financial cushion for any economic downturn.

4. Energy and grain prices have eased in the recent weeks

As mentioned previously, energy and grain commodity prices took a turn during the beginning of the Russia-Ukraine War. Recently, from the week ending June 13^th through July 18^th, West Texas Intermediate (WTI) crude oil has trended downward—decreasing 17.6 percent. During the same time frame, the weekly average price of regular gasoline decreased by 10.7 percent. With respect to grain, the average weekly cash corn and soybean prices decreased 10.2 percent and 7 percent from June 13^th to July 11^th.

5. Wage growth

Wages have grown since the inception of the pandemic. However, not at the same rate as inflation.  Inflation has eaten into the paychecks of Americans but increased needs for labor have increased employment costs. Wage growth has been larger for low-income earners. The 12-month moving average of median wage growth for the bottom quartile was 7 percent in June 2022.

Now inflation is most likely to affect each income bracket differently. Lower-income workers are sure to feel the pain as gas, housing, and food prices remain high relative to their incomes as these are major components of their proportion of spending.

The Protein Commodity Market

Many protein commodities at the wholesale level are, in fact, adjusting lower. However, many still are priced at levels above their seasonal historic norms. When harder times persist, consumers typically switch their consumption expenditures to consumer staples. For proteins, this means increased demand for poultry and eggs. But the effect inflation has had on these products seems to be blurred with the reemergence of HPAI late last year through today. Although not running as rampant as the 2015 outbreak, supply issues and fear of the virus taking on commercial flocks has been very real – further increasing prices. So quantitatively defining the switch to lower priced protein goods is difficult to assume. And as mentioned above, consumers appear to be more well-positioned to take on price increases for the short term. Of course, there is no immunity. If market conditions persist and inflation grows more than expected, we may see a clear correction in these markets to better support the switch-in-protein-demand claim. But for now, we believe this is an unfair assumption to make.

Consumer Opinion

When it comes to consumer opinion on the economy, the University of Michigan Consumer Sentiment Index and the Conference Board’s Consumer Confidence index differ. The Consumer Sentiment Index, reflecting consumers’ personal finances, has reached historic lows, while the Confidence Index remains elevated due to its focus on the labor market conditions. With mixed comparisons, it is difficult to make a clear judgment on how consumers are in fact reacting to the current state of the economy.

What is next?

There is no denying that inflation is a problem. A problem Washington D.C. and the Federal Reserve Bank will debate constantly in the months ahead. Jerome Powell, chairman of the Federal Reserve Bank, will have a difficult task that will be challenged by both sides in Washington on how to adjust interest rates. The preferred metric by the Federal Reserve is to measure inflation through shifts in personal consumption expenditures, but Powell continues to monitor headline and core inflation very closely in the process in conjunction with adjusting interest rates higher.

The recession factor linked with the most recent inflation data will always be debated. Of course, not every economist agrees with one another. But it is imperative for any market participant to understand that not one metric overpowers the rest in defining a recession. Just as the Business Cycle Dating Committee at the NBER accesses the health of the economy, we should too. Hopefully, monetary and fiscal policy leaders get their next steps in tackling inflation correct. Because, if this delicate situation is handled poorly, both consumers and producers will feel the pain.  

Photo Credit: chayanuphol / Shutterstock.com

Andrei Rjedkin
Urner Barry
1-732-240-5330 ext 293
arjedkin@urnerbarry.com 

Angel Rubio
Urner Barry
1-732-240-5330
arubio@urnerbarry.com

Akash Pandey
Urner Barry
1-732-240-5330
apandey@urnerbarry.com