Pre-market inventories: The strange reason the U.S. economy is shrinking

Factories are closing. A wave of job cuts and few vacancies. Huge financial losses that hit most industries.

So what’s going on and where could we be heading? The answer to both questions lay in warehouses across the country.

Breakdown: U.S. GDP for the second quarter fell at an annualized rate of 0.9%, according to the Commerce Department’s first reading released Thursday. This followed a 1.6% contraction in the first three months of the year.

The data has fueled debate over whether the United States is already in a recession, which economists say is a risk as the Federal Reserve hikes interest rates and inflation curbs spending of consumption.

Fed Chairman Jerome Powell, for his part, doesn’t think that time has arrived — at least not yet.

“I don’t think the United States is currently in a recession,” Powell said earlier this week. “There are simply too many sectors of the economy that are performing too well.”

But GDP isn’t going negative on its own, and Thursday’s data contains useful pointers to understanding a complex economic moment.

Pay attention: Inventory, or assets held by a business that have not yet been sold, had a major role to play.

Companies stocked up on numerous items late last year as they tried to dodge supply chain issues and ensure they could meet growing demand.

But in recent months they have realized they have too much, especially at an uncertain time for manufacturers and buyers, and are hesitant to place new orders.

The subsequent slowdown in inventory accumulation contributed to much of the contraction between April and June, removing two percentage points from economic output.

Why it matters: Some economists and investors believe that because growth was pulled forward in late 2021, activity in the first half of 2022 looks artificially weak.

“For me, the fourth quarter was a little inflated,” said Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services. “Everyone was hoarding stuff.”

But that doesn’t mean inventory levels should be ignored. In fact, they contain useful clues for monitoring how fast the US economy might slow from now on.

Ed Cole, managing director of discretionary investments at Man Group, told me there are two main reasons he closely monitors the rate at which US stocks are rising “as an indicator of where we are in the cycle.”

  • If customers buy fewer products, businesses won’t place new orders, which will weigh on factory output.
  • If companies are forced to dispose of unwanted inventory at deep discounts, this will put pressure on revenues and profits.

“Recent warnings from major retailers have demonstrated this effect quite clearly,” he added.

See here: This week, walmart (WMT) cut its profit outlook, warning that customers are changing their buying habits. This requires markdowns to eliminate excess inventory of products like clothing.
It’s not the only company with this problem. American outdoor brands (AOBC) recently told analysts that “rapidly rising inflation and interest rates…have pushed up inventory levels.” Hasbro (HAS) also said it had “above average stock levels” for this time of year, while stressing that its stock was “very high quality”.

Amazon dodges the tech crisis

Amazon (AMZN) is going strong even as other Big Tech companies stumble.

The e-commerce giant on Thursday reported net sales of more than $121 billion between April and June, up 7% from the same quarter last year and above Wall Street estimates.

Investor preview: Amazon shares jumped 12% in premarket trading as investors shrugged off the company’s $2 billion loss, which it attributed in part to its investment in the smartphone maker. Rivian electric trucks.

Instead, the focus is on the company’s guidance for its current quarter, which ends in September. Amazon expects net sales between $125 billion and $130 billion, a 17% jump from last year.

“Big Tech has been mixed this earnings season, but Amazon has proven that the strongest can survive even the toughest environments,” said Hargreaves Lansdown analyst Laura Hoy.

Meanwhile, Apple (AAPL) looked less impressive. The world’s most valuable tech company posted $83 billion in revenue, up just 2% from a year ago and a marked slowdown from the breakneck growth it’s been experiencing in 2021. Profits fell by almost 11%.

Still, Apple beat estimates, pushing shares up more than 2% in premarket trading.

My thought bubble: Even giant corporations aren’t immune to the pressures of an economic downturn, but they are better insulated.

Having a cloud service business certainly helps. It was a bright spot for Microsoft (MSFT) and Google (GOOGL), and Amazon Web Services posted a profit of $5.7 billion. The unit’s revenue reached nearly $20 billion, an increase of 33% over the same period last year.

Chinese leaders have been silent on economic goals

China’s top leaders have remained silent on the growth targets they set for the year as the world’s second-largest economy battles a largely self-inflicted economic slowdown.

In early March, the Chinese government said the country would aim for an increase in gross domestic product of around 5.5% this year. It was China’s lowest official economic growth target in three decades. Even so, economists said it looked increasingly out of reach.

See here: Earlier this week, the International Monetary Fund lowered its GDP growth forecast for China to just 3.3% this year, as Covid-19 shutdowns and a crisis in the housing sector weighed on its expansion.

Now the country’s leaders have remained silent on growth targets, reports Laura He, my colleague from CNN Business. At a key meeting of key leaders on Thursday, there was no mention of GDP targets.

Analysts say it’s a sign that the government thinks it may not be able to meet its targets after all.

“In today’s meeting, the decision makers used the new phrase: ‘Strive for the best outcome.’ this year,” said Larry Hu, chief China economist at Macquarie Capital.

Next

Chevron (CLC), Blooming brands (BLMN), ExxonMobil (XOM), Newell Brands (NWL) and Procter & Gamble (PG) publish the results before the opening of the American markets.

Also today: The Personal Consumption Expenditure Price Index arrives at 8:30 a.m. ET. It is the measure of inflation most watched by the Federal Reserve.

Coming next week: The US jobs report for July will be scrutinized for evidence that the economy is slowing faster than expected.

– Martha White, Alicia Wallace, Rishi Iyengar and Clare Duffy contributed reporting.

Garland K. Long