| As we work our way through earnings season, let’s revisit the idea that companies are propping up their revenue by raising prices… not by selling more products. For many companies, the ability to increase the price of their products has masked the reality of lower sales volumes. On the consumer side, excess savings accumulated during the pandemic – and now credit card spending – is allowing them to maintain spending, giving companies the current pricing power they enjoy. That pricing power is supporting corporate sales, so companies have been slower to cut costs (i.e., reduce headcount) than perhaps is appropriate given the slowdown in the number of products being sold. This of course perpetuates tightness in the labor market, further provoking the Federal Reserve to raise interest rates. Eventually, the Federal Reserve will tighten enough to induce weakness in the labor market. This is a necessary casualty of reducing inflation. In our opinion, this will begin to destroy corporate pricing power, and ultimately pressure top and bottom-line results. Amazon is the perfect example of the current state of nominal revenue versus real (inflation-adjusted) revenue. Amazon’s inflation-adjusted sales have fallen to their pre-COVID trend, while nominal sales remain 14% above. At the same time, their labor force remains 20% above the previous trend. Meanwhile, consumer staples companies like Clorox have already seen nominal revenues drop 11% from their peak, with real revenues falling below the pre-pandemic trend. We fear that Clorox is a good example of what is to come for many other companies as we move toward the end of 2022. |
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