Mike Bailey, director of research at FBB Capital Partners, joined Closing Bell to discuss the state of the U.S. economy amid a second-straight quarter of GDP contraction, with the emphasis on consumer spending, which makes up some 70% of the GDP.

Closing Bell

Inflation Dims Consumer Confidence, Causes Shift in Shopping Habits

welcome back to closing bell on cheddar news. Everyone while inflation continuing to take a toll on the american consumer, we saw glimpses of that this week in the form of a GDP contraction for the second quarter in a row and the retail giant walmart slashing its profit outlook for the rest of the year with Procter and Gamble mixed earnings, but saying customers are pulling back on spending as inflation limits how far their dollar goes. So joining me now is mike, bailey director of research at FB. B Capital Partners. Mike, thanks so much for joining. How is inflation dooming americans confidence in the economy right now? Yeah, we've, we've seen certainly a lot of pressure over the last few weeks. I think really the biggest sort of most dramatic impact. We've seen you really called it companies like walmart target these big box companies. I think some of them really have been uh, kind of betting incorrectly in terms of what consumers would be wanting at this point in the cycle. So, you know, big TVs, furniture or things like that coming into this period where there's a ton of inflation, consumers are really stressed in terms of their wallets, their trading down. And so companies that kind of bet the wrong way are really feeling it. You also mentioned some companies like Procter and Gamble, we are seeing a squeeze. They're not quite as dramatic as some of the big box companies, but again, laws of supply and demand that their intact. So companies are seeing prices moving up, they're raising prices, consumers are seeing that they're pulling back just a little bit. But I think really the more dramatic example has been the big box companies such as walmart and Target. Well it is interesting mike I mean we technically are in a recession right? That's two straight quarters of comic contraction, that's the technical definition. But we heard this week from some of the biggest power players out there, the president, the treasury Secretary of the Fed chair that they don't think that we're in a recession that there are still strong parts of the economy, the affluent consumers still spending and notably the jobs market actually still quite strong. Do you think we're in a recession? Uh Great question right there. I would say no, I think a true recession is when consumers across the board really feel it. Um So you know what's going on with consumers um many of them still have jobs, so unemployment really low, it's still a tight job market. Um consumers are feeling you know, pain at the pump, pain at the grocery store etcetera. But I think a true kind of recession that really could kind of drive the economy lower, that's when people are out of jobs, they can't afford things, they're really pulling back. We haven't seen that yet. That could have, we could see kind of a modest or shallow recovery could be tougher. You know there's a lot of things out there that we just don't know yet. Maybe energy takes another big swing up and that brings about another round of inflation and the Fed keeps hiking a lot of things that could happen. But I think at this point as a, as a consumer, as an investor, it feels more like this, this technical definition, not a true, really deep sort of gut punch type of recession that we've seen in the past. Let's talk about oil prices because I do think you're right. I mean it's, there's no denying that oil prices have caused a spike, a massive spike in inflation. They've heard consumers on the lower income scale, the most right, filling up your tank of gas has been extremely costly of late. But fortunately those prices have been coming down in about the past six weeks or so. Are their seasonal factors mike that could drive up gas prices into these winter months? Or do you think we might have seen the peak? Do gas prices usually peak around the summer months? Yeah, you're right. So generally there's this summer driving season, you do see prices tend to move up a little bit more in the summer tends to fade a little bit more towards the fall that that would be in a typical year, 2022 not so typical. I really think, you know, for example, geopolitics, what's happening in europe and Ukraine etcetera and frankly even china, your guest earlier was talking about, you know, visits to china etcetera, um demand coming out of china, if there's another major lockdown. If china slows that slows demand for oil prices come down. So a lot of things could happen differently this year. But if we excel all those other changes as I would expect in general a little bit more of a fade in terms of energy prices. You know I think we should just state the obvious too right. I think people actually we're pretty optimistic at the start of this year. We were in a much different position. Oh Macron was spreading quite wildly but we had vaccinations, we had boosters, we had treatments as well. And even as the virus does continue to spread at least here in the U. S. Hospitalizations and deaths remaining well below what they were two years ago before we had some of these options. But I think you rightly point out mike there are factors out of our control. Right. Other countries like china, the world's second biggest economy and a crucial country in the supply chain has a zero tolerance policy in a much different approach to Covid and Russia's ongoing invasion of Ukraine shows no signs of abating anytime soon. And so how important are those two risks? Those latter two risks when trying to plan for the future in this economy? Certainly a lot of risks out there. So you know whether if you want to go back to Covid and the virus that that's certainly meaningful. We just frankly don't know are we going to get another wave as bad as omicron that hit this winter. It could be or not really. There's a lot of things out there. I think consumers are sort of thinking about, you know, which what should I do, how should I plan for that? Businesses are certainly planning for staffing levels and that sort of thing. I think from a consumer perspective, it's maybe a little bit less relevant in terms of thinking through on an annual basis. What do you really do? A lot of folks take a big summer vacation, for example, that's a big budget item that's that's going to be gone now for folks that are planning, let's say a big winter trip that that is something to consider. So that gets into, you know, Dubai refundable tickets, do you have a plan B if there's another wave, that sort of thing. The flip side again, other geopolitical event, you know, for example energy. What are the prices of gas and how does it impact airline tickets? And then you could even go as far as what's going on in Russia Ukraine, if someone's planning a trip to that part of the world, europe etcetera. So a lot of things out there. But I think for the average consumer staying at home, working, just plugging away, make sure you've got a good steady income and possibly saving a little bit at the store, maybe trading down a little bit uh saving a few dollars here and there. All right, Mike, bailey Mike's the director of research at F DB Capital Partners. Mike, thanks so much for coming on on a friday afternoon. We appreciate it.