Jay Powell continues to hitch his wagon to a belief that the Fed has the ability to engineer a “soft landing,” featuring neither a recession nor high unemployment. He readily points out that the labor market is healthy, that household balance sheets remain robust and the corporate sector enjoys relatively high margins.
 

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These conditions, according to the Fed, will permit it to raise rates continuously throughout 2022 without impeding economic expansion.  Nonetheless, there is growing skepticism that the Fed cannot ward off a recession. Today, Alan Binder, a former Fed vice-chairman, went on record as saying that a recession is on its way (recession is likely). 

It is the corporate sector that is showing weakness, signaling a soft landing is less and less likely. The nation’s the largest store retailers, Walmart and Target, and largest online retailer, Amazon, reported relatively poor profit performances this past quarter. These companies are proxies for the outlook for overall consumption. More importantly, the way in which the companies missed their profit mark is very telling as to how recessionary forces are affecting their bottom line. The nation’s largest retailers identified features of this economy that call into question the degree of over-confidence exhibited by the Fed. To wit;

• Walmart cited the huge jump in fuel prices, rising labor costs and aggressive inventory purchases combined to hit their bottom line; while sales are expected to improve, the company lowered profit expectations and expected earnings per share to decrease by 1%; (WMT)
• Target experienced a 40% drop in quarterly profits, citing higher than forecasted operating costs; profits were hit by supply chain delays, higher fuel costs and a drop off in discretionary merchandise purchases. (TGT)
•  Amazon reported its first net loss since 2015, causing shares to take a dive; it cited a deteriorating profit outlook due to geopolitical developments in the Ukraine and the accompanying inflationary pressures, similar to those hurting Walmart and Target; (AMZN)
• Online advertising revenue is not longer immune to the coming recession; from the largest online ad companies, such as Google, to a much smaller entities, such as Snapchat, the tech sector is citing macro economic conditions for the fall off in ad revenues. (GOOGL, SNAP)

This poor profit performance should be taken as an early warning sign that a major slow down is underway in the US. Recessions are often started with corporate mismanagement of inventories, usually overstocking in anticipation of strong consumer demand. Today, many companies are building up inventories to get ahead of any future supply shortages and/or price increases. However, the customers are not buying in sufficient quantities to reduce excess inventories. Sales may be higher, but volume purchases are down. 

More importantly, consumers are reducing discretionary purchases as they struggle with higher prices for essentials such as food and energy. It is these discretionary purchases that normally support a heathy consumer sector and without them the profit outlook remains a source of considerable worry in the financial markets. Finally, advertising is one of the first expenses to be cut as the economy slows and companies become ever more concerned with controlling expenses. None of the factors cited for the recent profit decline are in reverse. The Ukrainian war continues to hit the food and energy supply chains. The Chinese lockdown continues in full force and the data emanating from China clearly indicates further problems in sourcing supply from Asia.