Inflation and recession fears are squeezing some industries harder than others

A woman pushes a shopping cart down the supermarket aisle at Target in Annapolis, Maryland, May 16, 2022, as Americans brace themselves for the shock of summer stickers as inflation continues to rise.

Jim Watson | AFP | Getty Images

People still seem willing to shell out for travel, a movie, and a drink or two, even as rising prices and fears of a recession push them back in other areas.

The way people spend their money is changing as the economy slows and inflation drives up prices everywhere, including gas stations, grocery stores and upscale retail stores. The real estate market, for example, is already feeling the pinch. Other industries have long been considered recession-proof and may even be enjoying a shock as people start to leave again after hunkering down during the pandemic.

Still, shoppers everywhere are feeling pressured. In May, an inflation metric that tracks prices for a wide range of goods and services jumped 8.6% from a year earlier, the biggest jump since 1981.. Consumer optimism about their finances and overall economic sentiment dropped to 50.2% in June, its lowest level on record, according to the University of Michigan monthly index.

As gas and food prices soar, Brigette Engler, a New York artist, said she is driving to her second home upstate less often and cutting back on eating out.

“Twenty dollars seems extravagant right now for lunch,” she said.

Here’s a look at how different sectors are faring in the economic downturn.

Films, experiences that sustain themselves

Concerts, movies, travel and other experiences that people missed during the height of the pandemic are among the sectors with strong demand.

Live Nation Entertainment, which owns venues and Ticketmaster, has yet to see people’s interest in attending shows wane, CEO Joe Berchtold said at the William Blair Growth Stock Conference earlier this month.

In theaters, blockbusters like “Jurassic World: Dominion” and “Top Gun: Maverick” also had strong box office sales. The film industry has long been considered “recession-proof,” as people giving up on more expensive vacations or recurring Netflix subscriptions can often still afford movie tickets to escape for a few hours.

Alcohol is another category that is often shielded from economic downturns, and people are heading out to bars again after drinking more at home during the early days of the pandemic. Even as breweries, distilleries and winemakers raise prices, companies are betting that people are willing to pay more for better quality alcohol.

“Consumers continue to trade up, not down,” Molson Coors Beverage CEO Gavin Hattersley said on the company’s earnings call in early May. It might seem counterintuitive, but he said the trend is in line with recent economic downturns.

Alcohol sales were also protected in part because prices are not rising as quickly as prices for other products. In May, alcohol prices rose about 4% from a year earlier, compared with the 8.6% jump in the general consumer price index.

Major airlines such as Delta, American and United are also predicting a return to profitability thanks to an increase in demand for travel. Consumers largely digested the higher fares, helping airlines cover rising fuel costs and other expenses, although domestic bookings have fallen in the past two months.

It is unclear whether the race back to the skies will continue after the spring and summer travel races. Business travel often increases in the fall, but airlines may not count on it as some companies look for ways to cut expenses and even announce layoffs.

People’s desire to get out and socialize again is also driving products like lipstick and high heels that have been hoarded during the pandemic. That recently helped sales at retailers like Macy’s and Ulta Beauty, which last month increased their full-year profit forecasts.

Luxury brands like Chanel and Gucci are also proving more resilient, with wealthier Americans not as affected by the price spikes in recent months. Lately, its challenges are more concentrated in China, where pandemic restrictions persist.

But the fear is that these dynamics could change quickly, and the short-term gains of these retailers could evaporate. More than eight in 10 US consumers are planning to make changes to reduce their spending in the next three to six months, according to research by the NPD Group, a consumer research firm.

“There’s a tug of war between the consumer’s desire to buy what they want and the need to make concessions based on higher prices hitting their wallets,” said Marshal Cohen, NPD’s chief retail advisor.

Houses, expensive items squeezed

The once buoyant housing market is among those clearly hurt by the downturn.

Rising interest rates have lowered demand for mortgages, which is now about half of what it was a year ago. Builder sentiment fell to a two-year low after falling for six straight months. Realtors Redfin and Compass announced layoffs earlier this week.

“With May demand 17% below expectations, we don’t have enough work for our agents and support staff,” Redfin CEO Glenn Kelman wrote in an email to employees later posted on the company’s website.

For the retail sector more broadly, Commerce Department data also showed a surprising 0.3% drop in May’s total from a month earlier. This included declines in online retailers and miscellaneous store retailers such as florists and office vendors.

And while demand for new and used cars remains strong, auto industry executives are starting to see signs of potential problems. With the cost of new and used vehicles climbing double digits from last year, car and other motor vehicle dealerships saw sales drop 4% in May from the previous month, according to the U.S. Department of Commerce. .

Ford Motor CFO John Lawler said this week that defaults on car loans are also starting to rise. While the increase could signal difficult times ahead, he said it is still not a concern as delinquencies were low.

“It looks like we’re moving back more towards the average,” Lawler said at a Deutsche Bank conference.

The restaurant industry is also seeing signs of potential problems, though how restaurants are affected will vary.

Fast-food chains have also traditionally done better in economic downturns, as they are more affordable and attract customers with promotional offers. Some restaurant companies are also betting that people will continue to dine out as supermarket prices rise faster.

The cost of eating out rose 7.4% in the 12 months ended in May, but the prices of food at home rose even faster, shooting up 11.9%, according to the Bureau of Labor Statistics. Restaurant Brands International CEO Jose Cil and Wendy’s CEO Todd Penegor are among fast-food executives who have emphasized difference as an industry advantage.

But McDonald’s CEO Chris Kempczinski said in early May that low-income consumers have started to order cheaper items or reduce their order sizes. As the largest US restaurant chain by sales, it is often seen as a beacon for the industry.

Additionally, traffic across the restaurant industry declined to its lowest point for the year in the first week of June, according to market research firm Black Box Intelligence. This came after the number of visits also declined in May, although sales were up 0.7% due to increased spend per visit.

Barclays analyst Jeffrey Bernstein also said in a research note on Friday that restaurants are accelerating discounts, a sign they expect same-store sales growth to slow. Among the chains that have rolled out new deals to woo customers are Domino’s Pizza, which offers half-price pizzas, and Wendy’s, which brought back its $5 Biggie Bag meal.

Among those struggling to adjust to a shift in consumer behavior are mass retailers like Target and Walmart, which have issued cautious guidance for the year ahead.

Target warned investors earlier this month that its fiscal second-quarter earnings would be affected as it discounts people bought during the pandemic but no longer want, such as small appliances and electronics. The big retailer is trying to make room on its shelves for the products in demand right now: beauty products, household items and school supplies.

CEO Brian Cornell told CNBC that the company’s stores and website are still seeing strong traffic and “a very resilient customer” overall, despite the change in their shopping preferences. Rival Walmart has also been discounting less-wanted items such as apparel, though the retail giant said it has been gaining market share in supermarkets as shoppers look to save.

— Leslie Josephs, Lauren Thomas, Michael Wayland, John Rosevear, Sarah Whitten and Melissa Repko contributed to the story.

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