Retail giant Walmart issued another profit warning last week. And the underlying reasons point to a stagnant US economy.
Walmart pointed to a change in the spending pattern of American consumers. As a result of the continuing rise in food prices, Americans have no money left for other purchases. In order to get rid of the increasing stock, Walmart has to lower its prices considerably, which results in lower profits.
Purchasing power problem
Walmart’s profit warning is not only important because of the size of the company. It accounts for about 10 per cent of all retail sales in the US and employs 2.3 million people, 1.6 million of them in America. The problem of rising inventories as consumers spend all their money on basic necessities such as food, drink and their mortgages is widespread.
So far, much of the loss of purchasing power has been offset by two trends: a decline in savings and an increase in the amount of outstanding credit card debt. It is obvious that both trends cannot continue indefinitely. And when it comes to American households with lower incomes, Walmart’s profit warning indicates that for this group, the ceiling now seems to have been reached.
Lower inflation
A positive aspect of higher inventories by retailers is that prices should come down. However, it remains to be seen whether this is immediately reflected in the inflation figures. Unilever, however, said it would continue to raise prices to cover rising costs. So for the time being, food will only become more expensive, which will not help purchasing power.
Spending freeze
With consumer confidence worldwide - including in the US - going down the drain, the possibility of a sudden spending freeze is real. With the economy crumbling, this would mean a recession almost immediately. This is something that equity markets are not priced for after the recent rally. They are only concerned with the end of the Fed’s series of interest rate hikes. However, in the short term, equity investors are likely to be disappointed.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every Monday on Investment Officer Luxembourg.
This article first appeared in Dutch on InvestmentOfficer.nl.
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