Shelley E. Kohan (00:02.328)
Hi everybody and thanks for joining our weekly podcast. I’m Shelley Cohen and I am very pleased to welcome economist Daniel Altman. Welcome Daniel.

Daniel Altman (00:13.516)
Thank you very much, Shelley. Great to be here.

Shelley E. Kohan (00:15.874)
Great to have you here. You also are the author of a fantastic newsletter called High Yield Economics. So if anyone in our audience hasn’t started reading that, go on to LinkedIn and make sure you read that. It’s a great dive into what’s happening in the economy and specifically for US retailers, there’s a lot happening there. So today what we’re gonna talk about is the second half of the year.

All of us know it’s going to be a challenge for businesses and retailers and brands. There’s so much uncertainty that’s out there in our current economic environment. So retailers and brands really have an unclear path heading into what is our most profitable time of the year. you recently, Daniel, you recently released your outlook for the second half of the year. And your belief is that the second half is going to bring more economic and political turmoil.

So let’s jump right into our topic and let’s talk about some of the most pressing factors that are impacting the US economy and perhaps some guidance on maybe how retailers and brands should be approaching the second half of the year. So Daniel, let’s start with kind of a general view of the economic landscape here in the US.

Daniel Altman (01:32.854)
Yeah, we have a very challenging landscape upcoming. We have a situation where inflation is still an issue. We’re still far from the Fed’s target of 2 % inflation, which has been their target for decades now, and we still haven’t reached that. And we’re still in a situation where the labor market is quite fragile. So the Fed really doesn’t know what to do now. They’ve been standing pat for quite a while because when you have inflation still a threat, you don’t really want to cut interest rates.

But when the labor market is fragile, you don’t really want to raise interest rates either. And at the same time, the fiscal picture is getting so dire that long-term interest rates are kind of heading up. And that means that even if you did cut interest rates, you might not be able to help people’s mortgage rates very much anyway. So we’re in a situation where economic policy has become very challenging, and yet we might be facing some real risks and threats in the second half of the year. So this is very difficult situation for anybody who’s making economic

policy and a very difficult situation for anybody who’s trying to plan what to do in terms of hiring and investment for the second half.

Shelley E. Kohan (02:39.554)
Yeah, it has been a challenge and I know a lot of the retailers out there are just, I don’t know, they’re just not, they’re very unclear about how to plan the next six months. And typically we plan so far in advance that everything we planned specifically for holiday was planned a year ago. So now we’re sitting here and we’re trying to figure out how we’re gonna survive the next six months. But let’s talk about something you mentioned. I wanna talk about the consumer price index. Where you think it’s heading. There’s a lot of different categories.

where retail sales are dependent on. So a lot of our industry is based on that discretionary spending. We do have some non-discretionary areas, that discretionary money that consumers have really kind of impacts a lot of what’s going to be retail sales for holiday season. So maybe you can just talk a little bit about that. And also if you can touch upon, you did this amazing kind of…

You took the advanced retail sales, you took the CPI, and you came away with some great key insights about what’s happening in our economy based on those two inputs. Can you talk a little bit about that as well?

Daniel Altman (03:51.042)
Sure, we can go category by category. Now you notice I didn’t even mention the word tariffs in my first answer to your question, but we’ll get there too. So right now, if you look at where the consumer is facing, they’re looking at a situation where housing costs are still quite high and gas prices, fuel prices in general had come down a bit, but now they’re starting to creep up again. So discretionary income is not that great. We’re looking at a situation where you’re going to have an extension of the tax cuts.

Disposable income is not going to face many challenges, but we don’t have a ton of room to maneuver. We’re seeing increases in apparel prices due to the tariffs. That’s finally starting to show up in the data. We’ve heard big retailers like H say now they’re going to really plan increases in prices for the second half of this year. And we’re starting to see it in durable goods as well. So thinking about furniture, appliances, electronics, those are really starting to pick up. Now,

As you mentioned, I do this chart every week in the High Yield Economics newsletter where I track since January what’s happened to prices and what’s happened to sales in each of these retail categories. So we look at the advanced retail sales and we look at the consumer price index and we actually track the path of those going from January month to month. And what we’ve seen so far is durables have gone up in price.

and sales have gone down. So consumers have really reacted to those price changes as you would expect, right? If prices are going higher, you tend to postpone those big purchases. In apparel, prices have gone up more recently, but people haven’t really responded yet. Sales have gone up alongside those prices. As you would expect, prices go higher and the dollar values go higher for sales as well. But that means that people haven’t been able to reduce their apparel purchases that much yet. And as the back to school period starts,

Shelley E. Kohan (05:16.238)
you

Daniel Altman (05:41.388)
we would expect people will still have to buy. The question is when consumers will be able to react. When will they be able to pull back on those apparel purchases as a response to those rising prices? When will that elasticity really start to bite? That’s a big question mark. The other categories like grocery, for example, we haven’t seen such a big difference. There have been some price increases and a small pullback in spending. If we look at things like fuel, like gas, obviously, as I said before, prices went down, people started to pop.

purchase a little bit more. There was a bit more spending on gas. Now, prices have come back up and spending has pulled back a little bit. That’s quite an elastic category for spending. So, do see a consumer response in some categories, not as much in others where consumers are a little more constrained.

Shelley E. Kohan (06:27.362)
That’s really interesting. So I want to touch upon two things. One is I want to go back to the grocery sector for one. And that is I just interviewed Stu Leonard Jr. He’s the you know who he is, but he’s running Stu Leonard’s. Yeah, he’s great. Anyway, and he was talking a little bit about, you know, the beef prices and how high the beef prices are, which really is unrelated to tariffs, right? It’s more related to what’s happening with cattle and climate and all of that.

Daniel Altman (06:41.132)
Of course.

Shelley E. Kohan (06:56.192)
And then we also had a little conversation about lobster, and that is due to tariffs. And because tariffs are high exporting lobsters, that has created more supply here in the US, so the prices have come down. So on the grocery store front, can you talk a little bit about what are you seeing in terms of increase of prices? I know generally when you look at the kind of the overall category, it looks not as steep, but when you dive into some of these key categories,

I think shoppers are really taking a lot of consideration when making their purchases in the grocery store.

Daniel Altman (07:33.666)
Yeah, there are a certain amount of imported goods that we see in the grocery store, cheeses, pastas, things like that. And not every consumer is going to buy those things, but they do tend to show up in some consumers baskets and those are going to face some increases in prices. We have a lot of produce that comes in from other countries. Some of those are facing tariffs now, some aren’t. The problem with a lot of this is it’s a moving target, right? We don’t know what tariffs are going to be even next month for a lot of these products.

Shelley E. Kohan (07:58.178)
Yeah, right.

Daniel Altman (08:02.282)
Some of them are covered by different treaties, but we don’t know what the status of those treaties is going to be even next month in some cases. So what happens as a result of that is grocers and retailers and wholesalers are taking a lot of precautionary measures. Some of them are trying to stock up on inventories, but with produce, how much inventory can you really carry? Right. I mean, you don’t want the stuff to go rotten. Right. So what do they do? You know, they try and find alternative sources of supply.

Shelley E. Kohan (08:20.886)
You can’t.

Daniel Altman (08:30.102)
That means reorienting supply chains. That carries a cost. You’re going to often go for higher price suppliers. You’re trying to figure out new ways to figure out your logistics. And that just carries more costs. So all of that stuff eventually shows up in the price that the consumer pays.

Shelley E. Kohan (08:46.658)
Yeah, all right, so let’s shift gears. Let’s talk about apparel for a second. Near and dear to my heart, I spent a lot of time in the apparel industry, but what we’re seeing is coming, actually June sales numbers, advanced sales just came out a few days ago, and I guess everyone’s surprised that they were so positive based on all the tariff talk, but like you said, I don’t believe a lot of that tariff has hit some of those apparel markets yet, meaning back in June. So we’re in July, June numbers just came out.

I agree with you. think we’re going to start seeing going into the next few months increases in apparel. So the increases from last month, is that due to tariffs driven price increases or is the consumer actually still spending money? And can you, based on the advanced sales or other data that you have, can you determine what sales increases are from consumers actually spending money as opposed to tariff price increases?

Daniel Altman (09:41.058)
So I think there are a things going on here. One is, think about the inventory cycle and apparel. It could be two, three, four months, depending on the retailer. And so if the tariffs hit around April, you maybe had a few months where you could sell your existing inventories at existing prices. And a lot of retailers were happy to do that. And then you start to think about, when am I going to increase my prices to deal with these tariffs? Well, if I think the tariffs are temporary, maybe I could take the hit for a little

A lot of retailers were making high profits. It’s not always the highest margin business, but profits have been at historically high levels recently. So maybe you take the hit for a little while, hoping that the taco trade is going to happen and tariffs are going to go back down and, you know, it won’t be a permanent thing. But then as you start to think, well, now it sounds like these tariffs are really here to stay. Then you start to think, well, what should the timing be? When should I actually raise my prices? Well, I don’t want to raise them before everybody else because then I could lose market share.

So I want to try and make sure that I raise my prices at about the same time as everybody else. So then you start to try and sound out other people a little bit. You hear CEOs and CFOs on earnings call saying, well, we think we might do it in the second half of the year. We’re looking at 5 % or 10%. And you sort of start to hear the chit chat and the hubbub. And everybody’s trying to sort of informally coordinate without doing anything illegal when the price increases might happen.

And then you start to think, well, when might the best time to raise prices be? Well, everybody has to buy back to school stuff. That’s when demand is sort of the least elastic. That’s when everybody really has to buy. That’s when they’re going to have to soak up these price increases. So maybe back to school is the best time where we can all do it together. It’s kind of a focal point for us. And the consumer is going to have to pay the higher prices. I think that’s when a lot of this is going

Shelley E. Kohan (11:13.24)
Right?

Shelley E. Kohan (11:29.112)
Yeah, I think you’re right. think the whole point about the need for back to school and clothing and that going right into holiday, it seems like an opportunistic time to look at those price increases. So now let’s talk a little bit about, so we have what’s happening in our economy. We have the Fed rates and all of this, the unemployment is very low. What’s happening in labor markets and…

you know, should we be thinking about in terms of labor markets? You made a really interesting point in your newsletter, which I thought was great, and you said the Fed may be underestimating the labor market weakness. So can you talk a little bit about that?

Daniel Altman (12:11.298)
Yeah, a couple of things happened in the labor market in the last couple of months. One is we had these big layoffs of federal workers. A lot of it was essentially forced layoffs where people took voluntary resignations, they got severance pay. The funny thing is that, or not so funny, but the unusual thing is that if people are on severance, which can last for several months, they’re still showing up on payrolls. So all that payroll information that the government puts out shows those people is still employed.

And as a result of that, we can underestimate what the real weakness of the labor market is. Those people are going to need new jobs pretty soon. The other thing that’s happening is we saw a lot of hiring going on before the tariffs hit because there were a lot of companies trying to bulk up their inventories and they needed logistics. They needed people to come in and stock all those shelves, essentially, and get all those inventory salted away. Those jobs aren’t going to last forever.

So I think those two things really pushed up a lot of the hiring for a couple of months in the spring. Now, I think that into the second half of this year, we still see quite a fragile labor market because there’s very little churn. There hasn’t been much hiring and there hasn’t been much firing. It’s very unusual to see the unemployment rate this low with such low churn. And that means that if any weakness hits this market, it’s going to show up in unemployment almost right away. So

Shelley E. Kohan (13:30.03)
Hmm.

Daniel Altman (13:40.306)
I think that if we see problems hitting this labor market, if there’s more inflation and the Fed continually decides to stand pat on rates and there’s a break in the stock market because of disappointment by investors, if we see any other challenges to this economy, any other sources of uncertainty, geopolitical or otherwise, that continue the paralysis on the part of managers and executives and hurt hiring.

then this could be a very dangerous time for the labor.

Shelley E. Kohan (14:13.166)
Yeah, it’s interesting. So as you know, a lot of retailers do a lot of their hiring for fourth quarter going into holiday season. And so those plans have been set in place, whether or not they’re actioning on those plans yet. I think they’re kind of holding back a little bit. from a, you know, should retailers and brands hire? Well, we need to base it on what consumers are spending in sales, but we don’t know what that’s going to look like. So it makes the hiring process, you know, much more complicated. Should retailers and brands just be holding back?

If you wait till the last minute, you might not get the quality of candidate. It’s a big conundrum for us right now.

Daniel Altman (14:47.458)
Yeah, you know, I’m going to show my age a little bit, but I think back to the period leading up to the Gulf War in 2003. There was in between the recession in 2001 and the sort of invasion of Iraq in 2003, a kind of paralysis in the economy. The economy didn’t go into another recession, but growth was extremely low.

And the reason for that was nobody really knew what an invasion of Iraq would look like. So there was just so much uncertainty. People were unwilling to invest. They were unwilling to hire. And there was a real question about what consumer demand would look like in those situations. And as a result, we just had about 18 months of extremely low growth and the labor market really suffered. So I think we have a similar sort of uncertainty now, different sources, different causes, but similar sort of

of uncertainty.

Shelley E. Kohan (15:47.116)
It’s interesting. So when we talk about what’s going to be happening with the labor markets and what’s going on globally, retailers and brands, really, I mean, this is the time they make the most money. The whole Black Friday, going into a profit and the history of all that, I’m sure. But it is our most profitable time of the year, so we have to protect it. One of the things that concerns me, especially going into holiday,

is that when you go back and we talk about the tariffs and these tariffs that came on and the tariffs, I don’t know if you know this, you probably do Daniel, but with retailers when they negotiate a buy, they don’t actually pay the tariffs till the goods cross the line, right? So a negotiated buy from last year for this holiday is coming through and if the tariffs are higher, they’re paying a lot more for those goods.

who’s getting really impacted is the smaller retailers. The smaller retailers, the mom and pop shops, they simply can’t afford the capital required to get the goods over the line. And so I’m feeling like we might see a shortage in goods sitting on the shelves because major retailers cut back the skews, small retailers are trying to afford to bring in what they can. So when we talk about holiday season, so most retailers run off the four, five, four calendar.

the four five, four calendar running February through January, which makes fourth quarter November, December, January. But, and this kind of drives me crazy about my own industry is that whenever we talk about holiday sales, you know, we’re talking about November, December sometimes, sometimes we’re talking about the weeks between Thanksgiving and 1226, but we really should be looking at holiday as October through December because you know.

holiday has started in October for the past, I don’t know, five years. So do you have any kind of insights in, not necessarily fourth quarter for retailers, but what is this holiday, October, November, December, what’s it looking like?

Daniel Altman (17:51.692)
Yeah, I think that this year holiday is likely to be not terribly weak because we still have low unemployment. We have a very high stock market right now. And so I think people are ready to spend money. We have an economy which for a couple of years now has been driven by high spending, high income consumers, and they’re probably feeling pretty good right

So that chunk of spending that you get from those high income, high spending people is probably still intact. The question is more sort of what is going to be the effect of higher prices that feeds through to them. Now, when we think about what tariffs are really going to do, they’re probably going to have an effect on prices of maybe, you know, half a percent to one percent, which doesn’t sound like that much, but

when you compare an inflation rate of 2.5 % to an inflation rate of 3 % or 3.5%, that’s something that really gets the Fed to sit up and take notice. So what it means is that the Fed is not gonna be in any mood to cut rates and there’s gonna be a lot more conflict between the Fed and the White House as we’ve been seeing. And that just creates an atmosphere that’s very difficult for investment and very difficult for politics in general.

And that’s going to slow down a lot of other things in our economy. But as far as spending by high income, high spending people, I think that’s probably OK. If you’re a retailer that’s serving sort of working class rank and file Americans on Main Street, yeah, I think you still have some concerns because they’re going to be feeling the pinch of those price increases a little bit.

Shelley E. Kohan (19:37.912)
Yeah, and I always say that, you know, we’re so focused on sales, sales, sales, sales, and increasing sales and growing sales. At the bottom line, it’s really about, you know, the profit, right? What are you actually taking home? So if sales aren’t there, if retailers can at least get the profit that they’re looking for to continue on, I think that’s a win, even if we don’t have these great, you know, sales coming out of the fourth quarter.

Is there anything else regarding the end of the year, maybe outside of holiday or including holiday even, of what you’d like to talk about in terms of the economy in the U.S. or even global markets?

Daniel Altman (20:14.978)
Yeah, there are couple of things. One is the timing of the tariffs. You know, we’re looking at a situation now where August is the putative deadline for these reciprocal tariffs, which could be quite damaging, especially to apparel and durables. And I don’t know if there’s going to be another delay and another push of this deadline. As I’ve said before, there aren’t enough trade negotiators in all of Washington to do all these deals that are being talked about right now within the next couple of weeks. That’s just going to take more time.

whether the president likes it or not. But I just wonder if these things could get pushed to October or November. what if they do intersect with the holiday shopping period in a way where we see the stock market come down five or 10 % in October or November? Does that create a shock to the economy, which could actually affect holiday spending?

Yeah, I just don’t know if the folks in the White House are really thinking about retail in that way, or if they’re thinking more about Wall Street. And it’s just, it’s a big unknown. A lot of those folks don’t really play in the retail space. And so it may not be at the forefront of their mind. The other thing that I continually think about is this overall global fiscal issue. We have seven countries that are major economies around the world that are running

debt to GDP ratios of over 100%. That means that their debt that they’re carrying is bigger than their entire economy. One of those is Canada, which has a lot of financial assets as well. So it’s kind of in okay shape. But the other seven are all big economies, which are borrowing more than they ever have before at such high interest rates. And I just wonder if at some point the credit markets are gonna say, this is not actually that good. And we’re not actually sure you can pay back all your debts.

And then we see skyrocketing interest rates and big problems for investors around the world. And that could really be the source of a much bigger crisis.

Shelley E. Kohan (22:15.372)
Yeah, that’s a great point. Thank you, Daniel. I really appreciate you coming on Retail Unwrapped and talking about what’s happening in the economy. Any closing thoughts you’d like to share before we part?

Daniel Altman (22:30.914)
No, you know, I think that for people who work in retail, obviously they’re really close to the ground and I love hearing from them. So anytime anybody wants to comment on my posts on LinkedIn or on the newsletter, I love to hear from them. I hope they enjoy reading the newsletter. It’s free every Friday and I’ll be taking on more of these points this week.

Shelley E. Kohan (22:50.21)
That’s great. So definitely is your newsletter only on LinkedIn or is it also on the website?

Daniel Altman (22:56.578)
That’s right, it’s on LinkedIn and you can find it via my website, danielaltman.com as well.

Shelley E. Kohan (23:02.136)
Perfect. All right. Well, thank you so much and thanks for being here. It was great having you here and thank you to our listeners. Have a great day.