The Warning Signs of a Recession Are Now Heating Up

From record-high gas and diesel prices to a major spike in the price Americans paid for their weekend barbecue essentials, shoppers are seeing price hikes everywhere they go.

The latest Consumer Price Index (CPI) shows despite the overall pace of headline inflation easing, the cost of groceries alone increased 10.8 percent since May 2021, which is the largest annual increase in 42 years. The jump is being driven largely by the prices of meat, poultry and fish, up 14.3 percent in the past year, which marks the largest 12-month increase since 1979.

Glynn Tonsor, an agricultural economist with Kansas State University, says there are two major drivers of the price hikes for consumers. “One, is food,” says Tonsor. “Demand overall is strong, certainly compared to pre-pandemic levels. There is a little bit of weakness building, but demand pulls prices up, and the cost of producing food is also up."

It’s not just food causing price pain. The national average price for a gallon of gas hit another new record of over $5.00 a gallon, which is substantially above where prices were just a month ago, and nearly $2.00 more than what drivers paid a year ago.

“We're on the road in the summer more, so we may not be done with higher gas prices is the point,” adds Tonsor. “Yes, it does eat pocketbooks. All else equal, if even one input and your budget goes up, that eats into your discretionary income for other categories. When they all go up together that causes consumers to pull back, especially on bigger ticket items like automobiles and housing. And we are already seeing that.”

A JP Morgan Chase analyst recently projected gas prices could top $6 a gallon by August, and the thought of higher gas prices is already drawing concerns about the price pain eating into the demand for meat.

“There are some warning signs and a little bit of easing on meat demand for some consumers,” says Tonsor. “Those who haven't changed jobs and haven't had a pay raise may not have a wealth effect from the stock market, that group has the ones who are feeling the pinch the hardest, because they've taken a net pay cut in the last six to 12 months, due to inflation.”

Recession Talk 

Shoppers may be purchasing more hamburger versus steak today, but “Pessimism is pretty high with typical consumers as we speak,” says Tonsor. “In the past, that has been a barometer for recession coming.” “Consumers are starting to taper their spending because they’re concerned. That alone can cause what’s called a self-fulfilling recession. I think that's the most common narrative on the street now, in response to 6%, 8% inflation, depending on who you ask. Consumers are tightening their belt, and maybe that will reduce demand for products enough that it induces a recession in 2023. That's not a guarantee. But we need to watch that.”

Tonsor went on to say, “Typically a recession isn't defined until after the fact, but keep watching consumer confidence, as well as shopping habits, they are both solid indicators of what's to come.” 

Editor’s Take:

Turn on the news and talk of recession is everywhere. The government's CPI earlier this month showed that the food-at-home index rose 11.9% over the last year, the largest 12-month increase since the period ending April 1979. Numerous experts predict a recession in the next 12-18 months. While people may argue the fine points of what constitutes a recession in the technical sense, it is pretty clear that consumers are pulling back on their spending. Housing, both existing and new builds, is down for the past four months in a row. People are driving less because they cannot afford the gas to fill up their car or truck. There are even anecdotal stories about people not able to afford gas to drive to work so they are now using a bicycle or walking.

With increasing prices on every front and pull backs already visible along with certain additional interest rate hikes coming from the Fed, I would argue that we are already in a recession. With many consumers pulling back their spending, we believe farmers/ranchers will be your strongest customer base going forward. Don’t overlook any opportunity to communicate with them and show them how you can be of service with AgPack, the trucks they want or superior parts and service – it will pay big dividends!