“…the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month.” -Snap CEO Evan Spiegel

First-quarter 2022 GDP fell by 1.4%. Many economists and Fed members foresaw the economy slowing from its robust 6.9% pace in the fourth quarter of 2021, but few predicted an economic contraction. Despite the poor start to the year, many economists are optimistic about second-quarter growth.

The graph below shows the consensus estimate for second-quarter GDP growth is 3%, and the Atlanta Fed GDPNow model expects 2.4% growth.

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Following the first-quarter GDP, economist Ian Shepherdson, a frequent guest on CNBC, wrote, “the economy is not falling into a recession.”

We beg to differ with Ian and the “consensus.”

Recent warnings from corporate executives, like the one above, and rapidly declining regional manufacturing surveys and consumer sentiment make us wonder if a recession may have already started.  

Snap Goes Advertising

In our Daily Commentary, we led with the following paragraph about Snap, aka Snapchat: 

Snap’s stock fell over 40% in trading on Tuesday. Concerning us is not necessarily Snap stockholders or even the welfare of the company, but comments from its CEO. Snap’s CEO writes in a letter to its employees: “…the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month.”

Snap is a social media company deriving 99% of its revenue from advertising. Importantly, from a macro perspective, advertising expenditures tend to track well with the economy per the graph below.

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Snap is just one company, and typically we would not read much into the warning. However, his comments about a “further and faster” decline in the economy are significant because of their timeliness and that advertising expenditures are strongly linked to economic activity.

it is becoming more evident by the day that many companies cannot entirely pass higher prices and expenses onto consumers. As such, they must cut or limit costs wherever possible. Advertising is an easy place to start, as Snap warns.

Plunging Consumer Sentiment

It is not just Snap and the advertising industry that troubles us. Personal consumption accounts for approximately two-thirds of economic activity. Accordingly, consumer sentiment, which is primarily a factor of the financial state of consumers, is an important indicator to follow.

The University of Michigan Consumer Sentiment Survey is near its all-time lows of the last 60 years, as shown below.

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Within the report, they cite the following:

“Buying conditions for durables reached its lowest reading since the question began appearing on the monthly surveys in 1978, again primarily due to high prices.”

Et Tu Walmart?

Walmart and Target CEOs offered critical warnings about rising costs and shifting consumer preferences in recent earnings calls.

Per Walmart’s CEO Doug McMillon

“Bottomline results were unexpected and reflect the unusual environment. U.S. inflation levels, particularly in food and fuel, created more pressure on the margin mix and operating costs than we expected.”

“We like the fact that our inventory is up because so much of it is needed to be in stock on our side counters, but a 32% increase is higher than we want. We’ll work through most or all of the excess inventory over the next couple of quarters”

Per Target’s CEO Brian Cornell

“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,”

“…lower-than-expected sales of discretionary items from TVs to bicycles”

“We never expected the kind of cost increases in freight and transportation that we’re seeing right now,”

Consumers must spend more money on food, gas, and other necessities, leaving less money available for many discretionary products that stores like Target and Walmart sell. At the same time, wages, transportation, and inventory costs are rising rapidly. Retailers are increasingly struggling to pass on those higher costs to their customers.

Equally important, as Doug McMillon mentions, inventories are increasing. The graph below shows that Walmart’s inventories are growing at the fastest rate since 2000. Burgeoning inventories will result in fewer new orders, ultimately weighing on the manufacturers of their goods.

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