US ‘technically’ enters recession – now what? Lessons from winners in last downturn

“Technically we are in a recession when you look at just the basic definition of two quarters of GDP contraction,”​ and while consumer spending might not yet fully reflect this shift, they are starting to tighten their purse strings, Nik Modi, managing director at RBC Capital Markets told attendees last week during a webinar hosted by IRI.

“We do believe it is going to get a lot worse,”​ he said, pointing to shifts in how the government, retailers and manufacturers are managing inflation and ongoing fallout from the pandemic.

“The consumers have really been shielded by the inflation that we’ve seen, going back to late last year”​ when the government issued stimulus checks, paused student loan payments and expanded advance payments for child tax credits – all of which have ended or will soon, he said.

“This is a lot of money that was going into consumer pockets”​ or being redirected to other expenses, including food, clothing, rent and mortgage or other necessities, like school supplies, he explained.

At the same time, he said, retailers and manufacturers that thought inflation would be short lived or that they could absorb higher costs by managing other aspects of the business now realize they can’t offset all of it and are now pushing through belated price increases.

A ‘severe cliff in consumption’ looms

As these shifts take effect, consumers who have held steady in spending will start to pull back by trading down or out completely.

“As consumers, we really don’t want to compromise our lifestyles until we have to. And, I think, we’re approaching that point right now. My fear .. is that no one is really expecting what I think is going to be a severe cliff in consumption, which I do think is going to happen over the next several weeks and month going into the holiday season,”​ Modi said.

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