Is the consumer switching from manufactured goods to services?

Inflation has risen, hurting consumer confidence everywhere, as well as business and corporate profits. Yesterday we saw Eurozone and European consumer confidence to may remain at the same negative levels or worse, showing that the consumer is quite weary as prices continue to rise.

Eurozone consumer confidence in May 2022

  • Eurozone consumer confidence flash reading in May -21.1 points vs. -21.5 expected
  • Consumer confidence in April was -22.0 points

It’s not as bad as the drop in UK consumer confidence earlier today (a 40-year low), but it’s not a pretty picture.

UK consumer confidence in May

  • UK consumer confidence in May stands at -40 (April -38), falling to its lowest level on record
  • Consumer confidence in April was -38 points
  • Inflation and both rising rates weighed

British consumer confidence records date back to 1974. May 2022 hit the lowest since records began, hitting -40 points, matching a record low in April 2020 as the coronavirus pandemic swept through the country. Will this mean a recession for the euro zone? China is heading for a as manufacturing and services remain in sharp contraction due to lockdowns there.

Companies lacking profit estimates

Earnings at Target, Kohl’s and Wal-Mart posted significant declines in April, sending their stocks tumbling. This is a terrible signal on inflation.

“After a strong start to the quarter with positive single-digit comps through the end of March, sales declined significantly in April as we encountered headwinds from last year’s slowing recovery and an inflationary consumer environment,” Kohl’s representatives said.

Sounds like a weak consumer, but is it? Note that Wal-Mart raised its sales estimate for the year in the earnings report. Granted, part of that is people paying more for the same things, but that’s not a big cut. The other part of the shortfall was a 32% increase in inventory, which they plan to fix.

How are they going to solve this problem? Some of them will be lower orders, but some will also be discounted – that’s deflationary. Right now the market sees this as a sign of a weak consumer and a recession, but what if we just see a shift in spending towards services?

Earlier this month, hotel chain Marriott said the request was “gangbusters”. United Airlines said flight demand is almost back to 2019 levels, and that’s without a full return to business travel. Today, Kansas City Fed President Esther George pointed to that potential today and that it could ultimately mean lower rates:

“If people aren’t buying as many goods and they’re starting to adopt more normal patterns of consumption, maybe we don’t need to go that far to achieve some kind of balance in the economy. “, she said on CNBC.

Right now, it could be an inflation spike, as services inflation is accelerating while we haven’t factored in the abandonment of goods yet. Although many expected spending on goods to remain elevated, a drop on this front will not necessarily be bad for the economy as it will naturally allow supply chains to recover and prices to recover. normalize.

The conclusion may be that spending on goods that would have taken place in 2022-23 was brought forward during the pandemic. It will mean a step back. So while everything looks ugly at the moment, there’s a silver lining to the retail cloud. Maybe it’s the economy just healing itself.

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