It’s been a messy year for macroeconomic analysis. Wild swings in inflation, energy prices, the stock market and consumer behavior have led to mistakes by companies and investors alike. Retailers have gotten caught in these shifts, as evidenced by the way both Walmart and Target misjudged changes in consumer behavior that began in March. The stores ended up with too many goods that consumers didn’t buy as they shifted their spending to travel and leisure, or got squeezed by inflation.
Fixing these mistakes has led to pain for retailers. But this week both Walmart and Target said on earnings calls that they’re almost back to where they want to be. That’s significant because it means retail can shift from being a drag on the economy to being a driver of growth again. And it calls into question whether economic weakness will continue much longer.
There are a variety of ways to show how retail has slowed growth. The change in private inventories detracted 2% from the growth of real gross domestic product in the second quarter as companies began liquidating their excess merchandise. In 2021, retailers had added 400,000 jobs as they raced to rehire following pandemic job cuts, but since February of this year, they’ve cut 20,000 more jobs.
This shift has also shown up in the freight business. The trucking market slumped this spring once retailers changed their behavior, and ocean freight rates also fell as demand shifted and supply chains normalized.
When you’re a store that’s overstocked, merely selling down inventory often isn’t enough—you cancel orders too, and that compounds the negative economic effect. Walmart said it canceled “billions of dollars in orders to help align inventory levels with expected demand,” and Target said its second-quarter inventory actions “also included the removal of more than $1.5 billion of fall receipts in our discretionary categories.”
But the thing about inventory cycles is that shifts, while sometimes abrupt, tend to be short. Addressing excess inventory, John Rainey, Walmart’s chief financial officer, said, “At the end of Q1, we said this would take a couple quarters to work through. I would just reiterate that remains true.” Target, for its part, said it was more or less where it wanted to be, which is why it forecast a favorable profit margin for the rest of the year.
All this should shift the thinking of people who have been focused on continuously slower economic growth. Joe Weisenthal of Bloomberg News noted this week that the economy appears to be erasing some of the retail shock from this past spring, with trucking-company stock prices rallying.
Walmart and Target shifting back to expanding inventories over the next quarter or two could point to faster economic growth for the rest of this year. Surveys of companies could soon show new orders picking up again. Freight rates and goods prices that have been falling for months might rise again.
This would be mixed news for the Federal Reserve as it considers optimal monetary policy. On one hand, it would show that recession risks really are overblown, with retail being the first industry to complete its post-pandemic slump and return to growth. On the other hand, growth picking up at a time when the Fed is looking to slow it down could signal an alarming uptick in inflation.