Eyes on the Economy:
Light at the end of the tunnel?
Strategy & Insights
The dismal science is not looking so dismal in January. Going into the winter 2022, projections for 2023 were dire. China was struggling with Covid, Europe was about to go with very high fuel prices, and inflation was still weighing on much of the world. The narrative however has been evolving in January and February. The IMF increased its 2023 global forecast from 2.7% to 2.9% in January, stating that things are still soft but not as bad as they thought in October 2022. China is still working through its Covid issues but has reopened for business, which will drive both global demand and help the global supply chain. Europe is having a mild winter and is looking stronger than expected. Inflation is still too high, but it is moving in the right direction.
Looking at the U.S., global growth will help boost U.S. GDP and an improving supply chain will help with inflation. The U.S. GDP was up 3.2% in 2022 Q3, 2.9% in Q4. Both quarters were driven by strong consumer spend. And the Atlanta Fed, who has been the best short-term forecaster, is expecting 2.5% for 2023 Q1.
2022 Q4 Contribution to GDP
expected short-term U.S. GDP forecast for 2023 Q1 by the Atlanta Fed
In fact, of the eleven organizations we track for GDP prognostication, none of them are projecting negative GDP growth for 2023. The average expected growth from these eleven is 0.7%. This is lower than our long-term trend of 2%, but it is not negative.
2023 GDP Estimate
As of January 2023
There is still some recession talk, but it is expected to be mild which should not have much impact on grocery sales overall. Consumer spend is expected to remain solid and will be the main driver of GDP in 2023 as it was in 2022. Consumer sentiment has also been up for the last seven months and helps to explain the shift away from essentials toward higher priced discretionary categories.
University of Michigan - Consumer Sentiment
In January, the labor market, the Producer Price Index (PPI) and retail sales numbers are making life difficult for the Fed. The January jobs report observed that an additional 517k jobs were created, which was about 2x higher than expectations.
New Employees MOM Growth
The PPI increased month-over-month across a broad range of categories, including grocery, but is still trending down. The housing market is also showing some signs of rebounding as housing starts and builder sentiment have been increasing in recent months.
The January retail numbers also surprised on the upside and many are saying the 8% increase in social security checks (due to the inflation adjustment), holiday gift cards, and a more optimistic consumer are all helping to move product. We are also beginning to see a shift from essentials, like groceries and gas, to more higher priced discretionary items, another sign of an optimistic consumer.
In short, many of the economic signs are healthy. but are they too healthy? The Fed will be responding to the economic data and will likely be increasing the Federal Funds Rate (FFR) another 2-3 times. But as we can see from the chart below, the gap between the FFR and Core CPI is converging. We know from the historical data that that once they converge, we will be close to ending the rate hikes. The Fed is walking the tightrope and they are doing it well. If the interest rate hikes were too high, we would not expect to see the strong current economic numbers, and if they were too lax, we would not expect to see inflation falling. Looking back, it is an almost impossible task of cooling inflation and not sending us into recession. The mythical “soft landing” like the Yeti may exist.
Federal Funds Rate and CPI YOY
Grocery sales finished 2022 up over 8%, more than 2x the long-run trend. This growth was driven almost exclusively by price hikes and inflation, which finished the year up a whopping 11%, about 4x the long-run trend. Moving into 2023, grocery sales are still solid but are starting to soften as food inflation falls. Monthly YOY grocery sales numbers were regularly in the 9% range last summer but have been trending down, landing at 6.6% in January. And as the sun rises in the east, YOY grocery sales will get back to something close to its long-run trend of 3.0%. With more people working and eating from home, this long-run trend may get a 50 or even 75 basis point boost, which is significant. But anything north of 4-5% does not look sustainable.
Grocery YOY Growth
This is not necessarily a bad thing, however, as lower input costs help the bottom line even as the top line softens. Overall, 2023 looks to be another solid year for grocery as inflation becomes more manageable and less margin crushing, and while consumers may be a little inflation weary, they are expected to decrease spending in 2023. Given our CPI food-at-home forecast of 6% and Real Disposable Income expected to increase about 2%, we are forecasting grocery sales in the 3%-5% range. This is still above the long-run trend of 3% and will likely come with a stronger bottom line for most retailers in 2023.
Grocery Sales and CPI FAH Growth
In conclusion, we are still in the tunnel, but there is some light ahead. Global and the U.S. GDP growth in 2023 will be soft relative to long-run trends, but much of the data is moving in the right direction. And even if we do dip our toe into the recession waters, it is not expected to be very deep. The inflation roller coaster will continue, but the trends will largely be lower. The Fed is ready to do what is necessary while also doing their best not to overreact. There is too much data and experience to revisit the poor policy decisions of the 1970’s. The global impact of the Russian invasion is also less severe as new supply chain partners are discovered and Europe finds other fuel sources. Moreover, as soon as the conflict is over, hopefully soon, it will be a boost to global moral and will also be a nice economic tailwind. Finally, China’s Covid troubles appear to be moderating and they are once again open for business.
I will leave you with a quote from the IMF President Kristalina Georgieva on global prospects in January 2023 versus October 2022, “The biggest surprise is that the picture, while it remains very concerning, is less dire than it was just two months ago.” She went on to say, “It is just less bad.” Spoken like a true economist.