Small businesses are viewing the future with an eye of caution as their outlook on general business conditions reaches new all-time lows.
The fear that businesses have is based on inflation and fears around pricing. You just need to look at the logistical nightmare that lays before us (again!) to know that prices are going up across their supply chain as they have to increase wages to fill jobs. Even though labor isn’t a “top” problem, you can see that “Quality of Labor” is still a huge concern. A new employee needs to be trained, and if they are coming in without any real previous skills for the role they have- the delays will be even longer before they reach peak efficiency in that job function.
The jobs hard to fill have pulled back a bit, but you can see they are still near all time highs. But, the pace of hiring is expected to slowdown as either jobs are filled, positions are put on hold due to cost, or the function is eliminated. Hiring plans still remain elevated, but we expect to see them slow further as wage costs continue to rise.
Small businesses are still trying to pass through as much of the cost as possible, but we are seeing the pace of selling prices slow
When we layer higher prices with businesses reporting that poor sales are the single important problem- there is starting to be a pivot. It is still a VERY small shift, but this comparison is going to be a very important over the next few months. As businesses get more concerned around sales, it will be a leading indicator for retail sales, and an early warning sign for the “Consumer” portion of U.S. GDP.
There are already warning signs from the public consumer discretionary companies as the drag is cropping up in earnings commentary. If we look at the historical connection between discretionary spending and S&P Consumer Discretionary companies- we are already seeing pressure to the downside.
The consumer and businesses alike are getting hit on all fronts- especially when you look at how gasoline/diesel prices have had a strong move off the recent pause/small dip in April. Each price is sitting at record levels, but diesel is the one that has a fundamental problem given shortages in global storage. We expect to see diesel prices remain well above average because the “type” of crude needed to increase the distillate cut remains in short supply. It would be great to have that Keystone Pipeline right about now!
Inflation topped estimates core CPI accelerates M/M, which is a much bigger concern as we look ahead. We have been discussing that topline inflation was going to have tougher comps, so the rate of change was going to “cool” but the underlying price to consumer was still going to grind higher. The small business data reinforces what we have been saying as price increases are slowing- but still heading higher.
I think this is a great info graphic because the things that hit people the hardest have pivoted higher. It is also important to know that energy prices dropped in the month of April, but has pivoted HARD higher- breaking to brand new all time highs. We have been talking for over a year now that OER (Owners Equivalent Rent) has a lot of catching up to do and it will be the driving force behind Core CPI. OER is the largest component of the core calculation (over 40% weighted average), and based on rents/mortgages it still has another 18% of price increases to absorb over the next few quarters.
The numbers show a slowdown in the rate of change of inflation, which just means that CPI M/M rose .3% vs last months 2.5%. But, the expectation was for CPI to only rise by .2% but instead came in slightly hotter at .3%- and that includes a huge drop in gasoline prices. We expect to see inflation reaccelerate in May as more pressure comes from the energy and OER part of the equation.
The pressure on pricing is only made worse by REAL average earnings growth still firmly negative. The average worker is still seeing their wages not keep pace with inflation, which just confirms everything we have seen from savings and credit data. Consumers are putting less into savings, and have increased their use of credit back to Pre-Covid levels.
The leading indicators within the U.S. and internationally point to more pricing pressure on companies and the underlying consumer. The most recent data out of China only confirm the problems that we face, and the fact it will keep inflation (prices) pinned to the highs throughout the summer months. The Producer Price Index (PPI) was supposed to weaken further in China, but instead surprised to the upside. Given the lockdowns and logistical nightmare within China, we expect to see more pressure higher- which will be passed on in higher costs to their customers. The largest customer of Chinese products is the U.S. consumer, which will keep our prices elevated as companies attempt to push through more increases or at least hold firm on recent raises.
China also reported a “surprise” increase in local CPI with a large part of it driven by food pricing. So now we have China that is reporting another slowdown in employment, weakening new orders, and a spike in food prices. Given where global food prices are right now and how much China relies on the international market for their food- we don’t see these pressures being reduced any time soon.
The local pressure on the Chinese consumer will put a further dent in spending and underlying retail sales. The two largest economies in the world are facing pressure that is only made worse by China’s zero COVID policy.
All of this culminates in the U.S. consumer facing a mountain of headwinds even if the market tries to “spin” the topline number to be a positive backdrop. The topline number is still an increase of 8.3% y/y with more price increases in May sending us higher.
In May, we will see a continuation in wage pressure keeping prices for goods and services elevated as energy shifts to be positive again.
Regards,
Freedom Financial News
