Breitbart Business Digest: The Inflation Tax Hits Walmart

We’ve talked a lot over the past few months about the concept of an inflation tax. The idea is that high prices of necessities like food and energy can draw spending away from other parts of the economy.

This dynamic is now expected to take a big bite out of Walmart’s earnings. The company said on Monday that it expects adjusted earnings per share for the second quarter to decline by around eight and nine percent, a big revision from its earlier guidance for profits to be flat to up slightly. It said it expects full year earnings to drop by between 11 and 13 percent, down from the previous forecast of a one percent decline.

The company put the blame squarely on inflation.

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” Walmart chief executive Doug McMillon said in a news release.

In other words, the high prices of food are affecting customers’ ability to spend on general merchandise, forcing Walmart to cut the prices of non-food items. So, inflation in food is triggering deflation in apparel.

Same-store sales are expected to rise by six percent, higher than previously estimated, due to higher prices. But the company expects to earn a smaller profit on those sales because a larger portion of it will come from the low-margin food and consumables categories. Walmart shares sold off by nearly 10 percent in after-hours trading.

You can expect investors to downgrade their expectations across the retail space. If the largest retailer is getting squeezed by inflation, everyone is. Amazon shares sank by nearly four percent in extended trading. Shares of Kohl’s and Dick’s were down by a similar amount. Target shares were indicated down by nearly five percent.

Dallas Fed Manufacturing Index Business Conditions Plunge Again

The Federal Reserve Bank of Dallas put out an ugly report on its survey of Texas manufacturers. The index for general business activity turned negative back in April and has had a negative reading each month since. In June, the index improved to a negative 17.7 from the May reading of negative 26. Economists had penciled in a further improvement to around negative 12. Instead, the index fell to negative 22.2. This is the longest running streak of negative readings since the 2008-2009 global financial crisis.

The new orders index remained negative at -9.2, even worse than the -7.3 reading in June, suggesting a further decrease in demand. The growth rate of orders index also remained negative but improved slightly to -12.0. The production index, a key measure of manufacturing output in Texas, was largely unchanged at 3.8, a reading indicating a “modest” pace of growth. The longterm average for the production is 10.9.

Labor market measures continued to indicate robust employment growth and longer workweeks. The employment index moved up three points to 17.9, a reading significantly above its series average of 7.7. Twenty-eight percent of firms noted net hiring, while ten percent noted net layoffs. The hours worked index also remained above average but edged down from 11.8 to 9.5.

As we have seen in other economic data, the employment measures continue to be strong even while demand weakens. The employment index moved up three points to 17.9, a reading the Dallas Fed said is significantly above its series average of 7.7.

Although prices and wages continued to increase in the July survey, the pace moderated. The raw materials prices index dropped 19 points to 38.4, a reading still above its average of 28.0 but below its high of 83.3 last November. The finished goods prices index also declined, from 33.8 to 29.3. The wages and benefits index came in at 38.1, down 12 points from June but still well above its 20.4 average.

Tomorrow will be the Richmond Fed’s turn to report on its survey of manufacturers. The May score of minus nine and the June score of minus 19 were both far below expectations. The forecast for July is for a negative ten, but that might be overly optimistic in light of the Dallas report.