Are We at Risk for a Recession?
The stock market is close to a bear market (a 20% drop in the averages). Inflation is at a 40-year high. Major retailers reported decent comparable sales numbers but fell short on earnings. People are spending, though, and are, as a whole, sitting on quite a bit of cash. So what gives?
Fears of a recession are peaking, but are those fears justified? The Federal Reserve issued a hawkish report last Tuesday (5/17/2022) and said that a recession is possible in 2023.
“While we don’t necessarily have a recession in our forecasts, we do see the risk of a recession increasing”
Retail numbers are contradictory.
Three giants in the industry, Walmart, Home Depot, and Target, reported both good and bad. Walmart’s sales increased 0.1%, Home Depot’s advanced 2.2%, and Target got a 1.3% bump.
However, earnings were not good. Walmart reported $1.30 adjusted versus $1.48 per share, a big miss.
Target had worse numbers overall. While comp sales grew 3.3% and total revenue increased 4% compared to last year, the bottom line missed expectations, dramatically. Target shares fell 25% to about $162 in early Wednesday trading, positioning the company for its largest single-day percentage decrease since 1987. Earnings per share were $2.19 adjusted vs. $3.07 expected.
Home Depot was a bright spot, reporting fiscal first-quarter net income of $4.23 billion, or $4.09 per share, up from $4.15 billion, or $3.86 per share, a year earlier.
What does this mean to you and me?
A lot of the dollar increases in sales had to do with inflationary pressures. Prices go up, so do the sales figures. But while usually people buy fewer things when prices go up, that hasn’t happened this time. Savings are still at relative highs, so disposable income is also there to be spent.
Retail spending rose 0.9% in April, marking the fourth consecutive month of increases. Much of the increase was centered in higher consumer spending on restaurants, vehicles, and clothing.
But with the chance of a recession, a big concern is the housing market, which drives a lot of the economy: Home Depot, Walmart, and Target all benefit from new and old home sales from furniture, appliances, yard maintenance, etc.
Home prices, though, are still rising – up 15% on an annual basis as of late March. A drop in prices would not be as catastrophic as in a housing bubble (think Financial Crisis of 2008 and the burst housing bubble), though, and wouldn’t leave homeowners underwater on their mortgages. And there’s good reason for the rise in prices: Inventory is low and demand is high. If a recession came along demand could drop, especially if mortgage rates stay as high as they now are, which would force home prices down.
If the U.S. economy goes into recession, and home prices drop, that could be good. Inventory is low right now, so even a large drop in buyer demand probably won’t result in a housing market crash. In those circumstances it may afford financially secure first-time home buyers the opportunity to own property.
What will happen? No crystal ball, but homeowners are sitting on record levels of home equity. That means even in a recession, prices shouldn’t fall to levels that would wipe out that equity. With inventory so low, a recession in the near term might not affect home values much at all.
Own a home? You can take comfort in that.