Putting the recession in perspective

Guest columnist Tim Stump considers the challenges alongside many of the positives in today’s economy.

Recession is defined as two consecutive quarters of negative GDP growth. So yes, we are technically … in a recession.

But of course we are, given the $3 trillion stimulus that the U.S. government has poured into the economy. Those dollars temporarily boosted many sectors of the economy, such as home furnishings, outdoor furnishings, housing prices (also stimulated by record-low mortgage rates), office furniture for the home, second homes at the beach, and much more. Meanwhile, some industries suffered, such as the airlines, rental cars, and UBER/Lyft, not to mention suppliers of hospitality furniture, office furniture, etc…

So here we are, mid-year 2022, and the post-Covid era seems to be emerging, and the world is attempting to settle into a new normal. Many economists and prognosticators are preaching gloom and doom and that the next great recession is already among us.

We see a more nuanced situation in the U.S. economy, one that is settling and re-balancing more so than fading away. An economy that is larger than when we started Covid, and one that has growth and profitability in the not-too-distant future.

The stock market soared during Covid — and has now dropped rapidly — but today’s Dow Jones Average is 8.8% higher than 12/31/2019. For the broader NASDAQ index, the growth is 25%. So, while we may feel our 401(k) shrinking, it is okay relatively. Let us remain calm and focus on the facts.

For our furniture industry clients, there is a slowdown at retail this year and most companies are registering between 20-30% off from last year’s peak revenues. However, our research shows that 2022 sales will be materially above the 2019 pre-Covid revenues, so net growth is occurring (although some is certainly attributable to price increases/inflation). Again, facts and a calm review of these facts should lead us to conclude that there is underlying strength in the system.

Banks are well financed with low leverage, and the consumer has four times less debt today than in 2019. There is strength to weather this storm. And housing prices have remained high, despite rising mortgage rates. Home values and stock portfolios are the two main engines of private wealth, and both are still on solid footing relative to pre-Covid figures.

Supply chain issues remain but appear to be easing with people going back to work. Container costs are down significantly from 2021 peaks and continue dropping (but still relatively high compared to pre-Covid). Unemployment is approaching 3%, which means we need to encourage immigration of workers and incentivize Americans to rejoin the workforce.

Inflation is a big issue, and across-the-board price increases have squeezed margins and hurt many companies that cannot or will not address how to deal with passing these costs along. However, we see gas prices already dropping quickly, labor prices starting to moderate, and commodity prices are now settling back to normal. Our belief is that inflation, while high this past year, is also settling back and will hopefully soon return to an acceptable level.

So, our outlook is still long-term positive, despite this rebalancing and post-COVID settling. The political and geo-political noise will unfortunately always be with us, and there is not much we can do about these influences day-to-day — especially heading into the US midterms and what promises to be a brutal season of presidential campaigning starting in 2023.

Successful companies are investing in their people in data analytics and IT systems, in diversifying their supply chains, and tightly managing their costs and pricing. We still see many winners among our client base, and their future is bright.

We do think there will be a small, but highly visible, cohort of distress sales in the coming year of smaller companies that are unable to weather the toxic combination of increased raw material prices, increased overhead as they ramped to fulfill 2021 & 2020 breakneck pace demand and now slowdown of demand. But we think this will be around the edges, not the core. We believe this next season will favor the larger companies that can afford more professional management, more employees, and more robust operating systems and data analytics.

Tell the 24/7 newscasters and the negative prognosticators to review the facts. The sky is not falling. There are grey clouds, to be sure, but the sun will still come up daily and there is good news ahead.

Tim Stump is a partner in Charlotte, N.C.-based Stump & Co., a mergers and acquisition specialist for the home furnishings industry.

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