The next consumer recession Preparing now UntappedThe next consumer potential recession| Finding of | Preparingthe 2016 Deloitte now Customs and Global Trade Management Benchmarking Survey Some say that we’re in a charmed, “Goldilocks” moment in the economic cycle: growth that’s neither too hot, nor too cold. But will this fairy tale end in the arms of a handsome prince—or in the jaws of a wolf in sheep’s clothing? 02 Untapped potential | Finding of the 2016 Deloitte Customs and GlobalThe next Trade consumer Management recession Benchmarking | Preparing Survey now Hard to believe, but it’s been 10 years since the collapse of Lehman Brothers, an event that helped trigger the 2008 economic meltdown. That recession, commonly referred to as the “Great Recession,” has become a defining moment for an entire generation. And the recovery that followed has proved equally unique, characterized by a measured pace of growth, stubbornly high unemployment figures, and slow wage growth. Many consumer companies struggled along with the economy, experiencing weak growth and strained profitability. This was compounded by industry- wide structural changes, allowing consumers greater access and choice. For some companies, this period of accelerating competition ushered in a boom, for others gloom, and for still others doom. Recently, however, the business environment has improved markedly: consumer confidence and spending are up, unemployment is at historic lows, and inflation appears to be relatively tame.1 After years of disappointing financials, some retailers are releasing increasingly upbeat results. Some economists are beginning to refer to the current stage of the recovery as a “Goldilocks economy”: not too hot, not too cold—just right. So what's the data saying: Is that really Grandma standing there before our eyes—or are we about to find ourselves face-to-face with the Big Bad Wolf of recession? 1 The next consumer recession | Preparing now Once upon a time... Since World War II, the US economy has faced 12 recessions, Individually, any one of these indicators is reason for caution; or one every 6.1 years on average, with the longest interval in concert, they could push a vulnerable economy over the between downturns clocking in at 10 years (1991–2001).2 We edge. History tells us that when the economy is strongest is currently find ourselves nearly 10 years since the end of the when we have to increase our sensitivity to a downturn. last downturn. Recessions don’t ring the doorbell and announce “I can predict with 100% themselves. But there are signs that the Evil Witch may be trying to poison the recovery: accuracy that the US • Flattening yield curve. An inverted yield curve (where yields on short-term T-bills exceed the yields on long-term economy will face another Treasuries) has historically been a leading indicator of recessions. The current yield curve has been flattening, recession, I just can’t and in turn the probability of a recession is on the rise.3 predict when.” • Tightening monetary policy. After a long period of accommodative policy, the Fed has been hiking the —Danny Bachman, Deloitte’s US fed funds rate, which usually leads to restrictive credit conditions. In fact, every recession since 1955 has been Economic Forecaster preceded by a period of tightening monetary policy and an increase in the fed funds rate.4 • Ultra-low unemployment. Low unemployment (the lowest since the months directly preceding the 2001 and 1970 recessions5) and rising wages are introducing inflationary pressures. That could spur the Fed to raise rates more aggressively, slowing economic growth. • Rising asset prices. Price-to-earnings (P/E) ratios of equities are 55 percent higher than their long-term average.6 If the stock market corrects, it will likely push down consumer confidence and consumer spending, which could trigger a recession. 2 The next consumer recession | Preparing now Watch out for the Big Bad Wolf The question facing consumer companies is simple: Are we “The four most expensive entering into an extended growth period or should we be preparing for a coming recession? The answer to this words in the English question can be paramount in setting strategy. language are, ‘This time it’s To explore the options that lie before the sector, we think it’s helpful to use a tale of two recessions as our looking different.’” glass: the dot-com bust (2001) and the Great Recession (2008–2009). —Sir John Templeton 3 The next consumer recession | Preparing now Mirror, mirror Each recession has its own triggers, characteristics, and paths to recovery. To grasp what the 2001 and 2008 recessions can teach us, we need to look into the mirror of time (see table 1). Table 1. Twenty-first-century recessions7 Dot-com bust Great Recession Housing market crash and interconnectedness of Cause Reaction to overvalued tech stocks. underlying investments. Relatively shallow, with impact concentrated in Global in reach and strongly affected all sectors of Reach business investment. the economy. Corporate profits Down 0.2% peak to trough. Down 13.5% peak to trough. Wages and salaries Down 0.9% peak to trough. Down 4.5% peak to trough. Spending on nonresidential investment fell 6.4% Spending on nonresidential investment fell 15.6% Business investment peak to trough. peak to trough. Spending on consumer goods grew slowly through Spending on consumer goods contracted 8.6% Consumer spending the downturn (up 0.6% peak to trough). peak to trough. Labor market Unemployment reached 6.3%. Unemployment reached 10.0%. The 2001 (dot-com) recession began in March 2001 in The 2008 recession (Great Recession) was different. The reaction to excessive investing in technology by businesses soaring housing market triggered the Great Recession in 2008. and an overvaluation of dot-com stocks. As a result, the 2001 But unlike the crash in dot-com stocks in 2001, the complex recession reverberated more deeply on Wall Street and in financial instruments used to fuel the real estate boom, and the business world than on Main Street and in the consumer the interconnectedness of the US and global financial systems, sector. That’s not to say households were unaffected: did the most damage. The complex interplay between physical unemployment rose from a low of 3.8 percent in spring assets, synthetic derivatives, and global financial markets 2000 to 6.3 percent in June 2003. But while consumer followed by a severe credit crunch made the Great Recession income growth took a hit, it soon bounced back, though ubiquitous. Consumers were rocked to their very core: not equally for everyone. Unemployment shot up to 10 percent, labor force participation fell off a cliff, and consumer confidence plummeted.8 4 The next consumer recession | Preparing now Who’s the fairest of them all? Figure 1. Change in discretionary income The two recessions of the twenty-first century were quite different in cause, effect, and magnitude of impact. We tend Dot-com cycle Great Recession cycle to gloss over the granular details of the recovery and discuss (1999–2006) (2007–2017) the rebound in terms of averages—but those numbers may $31K not tell the full story of a recovery. To look at the process of consumer recovery in a more $18K granular way, we broke down the averages. We used the US Census department’s definition of low-, middle-, and $9K high-income households (less than $50,000; $50,000 $4K $2K to $100,000; more than $100,000) to see how different groups benefited from the business cycle upswing. While the change in income across the three groups was telling, ($3K) we dug deeper and looked at discretionary income to Low income (<$50K) understand what consumers really have available to spend on retail and other consumer categories (see figure 1). Middle income ($50K–$100K) High income ($100K+) What emerged was an alarming pattern for consumers: The vast majority of the US population has not materially Source: US Census Bureau and US Bureau of Labor Statistics. participated in either of the two most recent recovery periods. After both twenty-first-century recessions, the The result was a very different consumer in the wake of upper-income bracket showed significant discretionary the downturns. income growth. The same pattern held true after the Great Recession. However, a substantial portion of the US consumer base—consisting of the low- and middle-income A majority of the US consumer base groups—is not materially better off today than they were nearly two decades ago. This income bifurcation—more failed to participate fully in the recoveries than region, gender, or generation—has impacted that followed, leaving a very different 9 spending patterns. consumer in the wake of the two most recent downturns. 5 The next consumer recession | Preparing now Into the woods As we studied the two most recent downturns and tried Growth in e-commerce and digital business to determine the true impact on the consumer sector, we The hype around dot-com companies and e-commerce was were surprised by what the data told us. Of course we found a major theme in the early 2000s. E-commerce continued the normal downturn in revenues, pressure on margins, its steady ascent despite the dot-com bubble bursting, and increase in bankruptcies and store closings. But what which some took as a sign of the death of the e-commerce was more surprising was the degree to which the structural promise. Many industry experts struggled to forecast change of the industry not only continued unabated e-commerce growth at this time, with the commonly held during the periods of downturn, but actually appeared belief that e-commerce growth would flatten, sales would to accelerate, leaving many of those that failed to reposition eventually hit a ceiling, and a new normal would then during the downturn even more exposed when the be established.