Earlier this year, Travel CEO’s across corporate America struck a surprisingly confident tone in the face of the recent Omicron outbreak. Many felt that the world was beginning to adapt favorably to the pandemic, and that the current outbreak would soon fade.
Flash forward a couple months and their prediction seems to be correct. Mastercard recently disclosed that international travel was above 2019 levels for the first time since the beginning of the pandemic(1). Delta saw a robust recovery in demand as the Omicron recovery faded and indicated trends would continue into the summer(2). Booking(.com) grew revenues 136% year on year, driven by stronger than expected travel trends in Europe. Like Delta, their guidance indicated summer would be a time of traveling(3).
People are clearly going places, presu
mably spending money as they do. With energy and food prices so high right now, how would this behavioral shift effect other parts of the economy?
Last week, ETSY and EBAY reported earnings. Being online shopping platforms, their results offer an interesting comparison with respect to the idea of traveling outside of the home. Unlike their counterparts in the travel space, the pair gave forecasts fo
r the coming quarter that missed Wall Street’s expectations. ETSY forecasted that its Gross Merchandise Sales, a measure of total platform activity, would decline from last year’s levels(4). Even Amazon indicated its next quarter would be slower growing then anticipated by Wall Street(5).
To me at least these trends are understandable. People are learning to live with COVID; learning to more healthily manage their fear of contracting the virus. Subsequent waves of the pandemic have been arguably less severe. Government policy is also beginning to reflect this shift, with mandates recently being lifted and restrictions becoming less severe. So, with less COVID, less stimulus, higher gas prices, and larger grocery bills, consumer face more of a choice between online consumption and real-life experiences. Recently they've preferred the latter.
I think the prevalence of traveling is an indication that parts of the economy are still strong, most importantly the consumer. Some may wonder how this idea relates to the most recent GDP report. For those who didn't follow the print, during the first quarter, the American economy was projected to grow by 1%. However actual results indicated that it contracted by 1.4%(6). This is alarming at a surface level, yet it's important to peel back some layers. The declines were primarily caused by a lower level of government spending, and a lower level of vehicle trade. Consumption, “C”, grew year on year, having a positive contribution to the GDP.
Taken as one, these factors lead me to believe the economy has already peake
d and is starting to decelerate. Another economic measure, the Purchasing Manager’s Index (‘PMI’)(7), demonstrates this idea. PMI is a survey of purchasing managers in the manufacturing and service industry. It can give insight on new orders, inventory levels, production, supplier deliveries, and hiring activities. Numerous research firms release their own versions of PMI, but each report hints at a similar underlying economy. PMI is technically considered a leading indicator and is therefore valuable to examine.
In most cases, new orders from customers are growing, causing factory output to grow as well. This in and of itself is important as it shows demand from consumers and other businesses is still prevalent in the economy. Growth in factory output, in a circular fashion, pushes input costs for commodities higher; factories need to keep buying raw materials to keep the machine moving.
Across different measures of PMI, I’ve seen slightly different signals. In some cases, new orders grew at their fastest pace on record, and subsequent measures increase similarly. In other cases, new orders are still growing quickly, but decelerating from prior periods.
Depending on how one chooses to measure PMI, they will arrive at a different result; yet in my view the exact answer here is unnecessary. Certain parts of the economy are accelerating, others are growing but decelerating. Overall, the economy has peaked, and is slowing its rate of change in some places(7)(8). This leads me to believe the chances of a severe recession this year are low.
Some Caveats: The global economy is precarious. The EU is moving closer and closer to a ban on Russian oil. The conflict shows little signs of abatement. Were there to be any significant level of escalation, a slowdown in Europe could come more quickly and potentially trickle overseas. Any escalation would push energy and food prices ever higher and would alter the ‘burn – rate’ of cash in pockets of global consumers. In turn, a recession could come sooner than feared.
The CPI (Consumer Price Index) print this week will also be important. Last week, the payrolls report showed a 0.31% increase in average hourly earnings from March to April(9). If wages are unable to keep pace, the timeline here could certainly look a bit different.
The Fed of course is a factor here. Jerome Powell hopes to achieve a federal funds rate of 2 – 2.5% by September and reassess at that point in time. Believe it or not, I disagree that excess hawkishness is needed to curb inflation. With so much of c
urrent price increases caused by supply chain bottlenecks, the Fed can only enact so much economic change via policy rates. Their current trajectory seems to be relatively aware of the underlying dynamics of the economy, and hopefully this translates to a ‘soft landing’.
Overall, people are still going places and buying things. The U.S. economy certainly looks different from last year, but its general trajectory in many cases remains upwards. The progression of conflict overseas will be a major factor, but for now, I think the economy has some ‘room to run’.
1. MA Earnings Release
2. DAL Earnings Release
3. BKNG Earnings Release
8. ISM PMI