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Are We in a Recession Now? Just Look at Discount Retailers

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The biggest debate in financial markets is whether the US economy is already in recession, and that’s because the data is decidedly mixed. Inflation is raging, but the jobs market is red hot. Perhaps the answer lies with discount retailers.

Even though the benchmark S&P 500 Index is fallen into a broad bear market by tumbling 20.2% this year through Wednesday, Dollar General Corp. has risen 4.58%, Dollar Tree Inc. has surged 18.1% and Ollie’s Bargain Outlet Holdings Inc. has soared 33.2%. This is a stunning level of outperformance, and reflects the theory that as inflation accelerates, consumers will be forced to trade down to cheaper and lower-quality goods sold by discount retailers. 

Lo and behold, all three chains are in expansion mode and opening new stores. Dollar General is forecasting about 10% revenue growth in 2023, and Dollar Tree a little less. “We are taking the necessary actions now to position ourselves for accelerated growth in what I view as the most attractive sector in retail, especially in the current economic environment,” Dollar Tree Chief Executive Officer Michael Witynski recently said on an earnings call. It’s never a good sign when discounters are the growth segment in retail.

True, there’s really not enough history behind these stocks to make any definitive statements about whether the economy is contracting. Ollie’s went public in 2015 and Dollar General in 2009. Only Dollar Tree has been in existence long enough to gauge its performance during recessions, but just barely, having gone public in the mid-1990s. Its shares outperformed strongly during the financial crisis, when there was true pain for the consumer by way of mortgage defaults, but less so during the dot-com bust, when it was viewed more as a growth stock.

The cost of living is going up rapidly, and the performance of these three companies suggest there is no end in sight. The Labor Department said this week that its consumer price index shot up 9.1% in June from a year earlier, the largest gain since the end of 1981. Bloomberg Economics has estimated that US households will have to spend an extra $5,200 this year, or about $433 a month, for the same consumption basket. It’s actually not very ironic that Dollar Tree recently raised prices to $1.25 from $1 because they were being squeezed by rising costs.

This wouldn’t be so bad if wages were keeping up, but they’re not. Adjusted for inflation, weekly earnings fell 4.4% in June, the Labor Department also said, the biggest slide in data going back to 2007. There’s evidence that consumers are dipping into rainy-day funds to make ends meet. At 5.2%, the personal saving rate fell in April to its lowest since 2009. Here’s an astonishing fact: More than a third of Americans earning at least $250,000 annually – almost four times the median US salary -- say they are living paycheck to paycheck, according to a survey by industry publication and LendingClub Corp.

All this makes Friday’s month retail sales report extremely important. The Commerce Department is forecast to say that sales for June among a control group that is used to calculate gross domestic product rose an anemic 0.3% after no gain in May. If not for the spike in gasoline prices, there would likely be no increase in retail sales for June, Bloomberg Economics said in report previewing the data.

But we don’t really need that report or the official declaration from the National Bureau of Economic Research to get around to tell us the obvious, which is that the economy is already in a recession. You may not be able to see a recession in the economic data, but the stock market tells you everything you need to know.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jared Dillian is the editor and publisher of the Daily Dirtnap. An investment strategist at Mauldin Economics, he is author of “All the Evil of This World.” He may have a stake in the areas he writes about.

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