Transcript: What does Walmart know?

This is an audio transcript of the Unhedged podcast episode: ‘What does Walmart know?’

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Ethan Wu
Walmart, America’s biggest retailer, is worried about the US consumer. The stock fell 7 per cent despite pretty good earnings because of scary guidance. Today on the show, we ask: Walmart, what are you trying to tell us? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined today by Walmart warrior Robert Armstrong.

Robert Armstrong
I did wanna just say at the top, I love Walmart. I love going to Walmart. They don’t have Walmarts here in New York City. And so whenever I am out in the wild beyond the five boroughs and I drive by a Walmart, I stop the car and I go in there. They got everything there. You know, they got hunting equipment, they got furniture, they got food. It’s like a paradise. It’s an earthly paradise.

Ethan Wu
I’m just imagining you like with your explorer’s hat and machete cutting through the thicket to emerge into the Walmart.

Robert Armstrong
New Jersey. (Laughter)

Ethan Wu
(Laughter) Well, we’re interested in Walmart principally because they have a finger on the pulse of what’s going on with the US consumer.

Robert Armstrong
Most important retailer in the country. No question about it.

Ethan Wu
Yes. And they just reported earnings today. They did fine on the revenue, on profits. They did great. They beat expectations. However, the stock fell because in the earnings call itself, the CEO and the CFO had some rather worrying things to say about the future and about the consumer.

Robert Armstrong
Let’s hear a couple of those.

Ethan Wu
I just want to read a couple choice excerpts: “The trend we saw in the back half of October was different than anything else we’ve seen this year. That made us pause and kind of rethink the health of the consumer. In the US, we may be managing a period of deflation in the months to come. We’re seeing credit tightening. We’re in a period of time 12 months after the Fed has begun raising rates. We’ve seen consumer balance sheets that are getting close to pre-pandemic levels. We’ve got the repayment of student loans, which affects about 27mn Americans”. There’s a lot there, and none of it is particularly encouraging.

Robert Armstrong
You know what I don’t like about it, Ethan? It really risks making us look stupid.

Ethan Wu
(Laughter) Most important.

Robert Armstrong
Because just a week or so ago, we were making a case for the great strength of the, not the great strength, the continued strength of the American economy. You know, we were talking about how, yes, there is tightening. Yes, the housing market is frozen. Yes, savings are going down. But look at all the good stuff. And one of the main good things we were talking about is a persistently strong consumer. And we were talking and all these things were true and I think remain true. We have seen in recent years very strong balance sheets. American household balance sheets have gotten stronger. Note especially at the low end of the economy, we have seen wages that are strong enough to keep pace with or even outpace inflation. We have an unbelievably low unemployment rate at 3.9 per cent or whatever it is. And we’ve seen the consumer basically keep GDP growing at an above-trend rate up until now in the third quarter.

Ethan Wu
Speaking of making us sound stupid, that’s why we and everyone else got the recession call wrong last year. The consumer was indefatigable, just strong again and again and again.

Robert Armstrong
Right. And so having had this little celebration of how wonderful thing everything is last week, we wake up this morning and Walmart is telling us we’re wrong again.

Ethan Wu
Yeah. (Laughter)

Robert Armstrong
That the consumer is slowing down. So my first question is, did we misread all that data? I would also ask, were there other clues out there that we somehow missed that would have told us about a softening consumer?

Ethan Wu
Yeah. Did we misread the data? I don’t think so. I think it may just be that we’re seeing potentially a pivot point now in the strength of the consumer. And we have seen, I think, some leading indicators of that weakness developing, especially in how consumers, especially at the lower end of the income spectrum, are dealing with delinquencies.

Robert Armstrong
So the one I think we did talk about on this show before is subprime auto loan delinquency, that those delinquencies have risen to a quite high rate historically. And that tells you somebody — a subprime consumer, somebody who doesn’t have great credit, probably doesn’t have great income — is falling behind on their car loan. In America, your car loan is your lifeline. That’s what gets you to work so, you know, that’s a very serious thing. So that was one thing we saw. I’ve also written about how some basic food companies are not say, the kind of Hershey’s and Kraft Heinz and ConAgra of the world have been making slightly spooky noises about consumer demand, about not being able to get the price increases they were able to get a year ago. So there were some noises at the margin in the US economy that things perhaps weren’t so great.

Ethan Wu
And we’re now seeing that emerge in what I wouldn’t call a leading indicator of the economy but rather kind of a coincident or a current indicator of the economy. And that’s things like retail sales, which came out yesterday and shrank for the first time in several months. In the third quarter, consumption, we had that, you know, bumper 5 per cent GDP report, 2.7 percentage points of which was from the consumer. Right now, estimates of where the fourth quarter is coming in, it’s looking more like 1.8 percentage points, which is not weak necessarily.

Robert Armstrong
No, not at all. 

Ethan Wu
But it’s just a lot less strong.

Robert Armstrong
That’s certainly trend growth.

Ethan Wu
Yeah. Yeah. It’s a reversion to trend. But just the deceleration from 2.7 to 1.8 is pretty noticeable.

Robert Armstrong
Yeah. And Walmart’s noticing it. Maybe that’s what they’re talking about. You know, it was great times. And now it’s times. (Laughter)

Ethan Wu
(Laughter) Times were had.

Robert Armstrong
Yeah, exactly.

Ethan Wu
Well, I think we have to touch on in this discussion consumer sentiment, right? Because this has been one of the kind of complexities of the post-Covid economy is that you had this resilient consumer who just would not give up on spending, and yet they all felt terrible about it.

Robert Armstrong
Yeah, and this is sold as a great mystery. But as we’ve written about in the column, I don’t think it’s a mystery at all. I think it is simply impossible to feel good about the economy in the face of high inflation. I don’t think it matters whether you’re employed, what your wages are doing. I walk into the store, I look at the gallon of milk and it costs 30 or 35 per cent more than it did two and a half years ago. And I think to myself, the dang world has gone crazy. And what’s next? Today, the milk price is going crazy. Maybe tomorrow I’m fired. It’s just the most vivid (Ethan laughs) representation of what’s going on in the economy, is these quickly changing prices. And it does not matter if my wages keep up with that.

It certainly doesn’t matter if the percentage rate of change of inflation has gone down. Normal people — by which I mean people unlike us who look at economic statistics all day long — don’t think in terms of the percentage rate of inflation. They think about the absolute level of prices. And so to expect people to look at a world in which inflation has gone bananas and a world, by the way, in which house prices have put houses out of reach for anybody who doesn’t already own a house. To expect them to feel good about the economy just because unemployment is low strikes me as bananas.

Ethan Wu
Yeah. And I think this bad sentiment point matters for this discussion, because you can imagine, OK, for a year or so we’ve had a consumer that feels terrible, but they look at their bank account and they’re in pretty good shape. They look at their pay cheque, they’re in pretty good shape, but they’re . . . 

Robert Armstrong
A little nervous. 

Ethan Wu
. . . but they’re a little nervous about it. And the second that my wage increases are getting a little bit slower, you know, unemployment has gone up 3.5 to 3.8 per cent in the last couple of months. That’s a few more people on the margin who are out of a job. You can see how with just a little bit of weakness in the labour market and on people’s balance sheets . . . 

Robert Armstrong
The consumer will pull back quite dramatically.

Ethan Wu
The consumer will pull back. Exactly. And you would expect that to begin at the lower end, where you mentioned earlier, Rob, that some of the biggest gains in the pandemic, both in terms of wealth and wages, went to people at the bottom end of the income and wealth spectrum. However, you would also expect that to be the first place that those benefits would dissipate.

Robert Armstrong
It’s the bleeding edge of the economy. That’s the part of the economy that is most sensitive to change.

Ethan Wu
Yeah. And then I suppose you wanna ask, is the Walmart consumer telling us something about the US consumer, you know, more broadly, or is it about the kind of, you know, bottom 50 per cent of Americans?

Robert Armstrong
Yes. Bottom 50 per cent, I don’t know. I personally think that a lot of different kinds of people shop at Walmart. I think the split between the Walmart shopper and the non-Walmart shopper may be more a kind of rural/urban split in some way. I don’t know if it’s strictly that only people in the bottom half or third of the income spectrum shop at Walmart. That said, a great engine for this economy — and I say this with sorrow — has been the top third, the top 20 per cent. When the low end is winning a little in America, the top end is winning a lot. So, you know, that part of the economy has been an important driver for the overall GDP number and maybe this won’t touch them.

Ethan Wu
Yeah. We should ask about where this leaves us in terms of the macro economy, right? On Tuesday, we got an incredibly good inflation report. Core inflation, excluding food and energy, came in at 2.8 per cent annualised. That’s felt very soft landing-y.

Robert Armstrong
Yeah. You and I were squealing like little children (Ethan laughs) when we saw that report. As of just a few days ago, it seemed like the thing we hardly dared to dream of — inflation down to target without a recession — was actually happening. And it was like a dream come true. And now it seems, or does it seem, that we were wrong again in that case?

Ethan Wu
We’ve been wrong constantly. Whatever we say, take the opposite. But I think you can cut it two ways. One way you can cut it is, OK, so all those recession fears from a year ago have just been kicked forward a year. And now the monetary policy, the dreaded lags are kicking in and the economy really is slowing down and recession really is coming. That’s one way you, or if not a recession, then at least a market slowdown. That’s one way you can cut it. The other way is well, to get inflation durably back to about 2 per cent or so, you kind of need some softer demand, some softer consumption.

Robert Armstrong
You don’t kind of need. You absolutely need. If demand growth stays above trend, it’s gonna be impossible to get inflation back to where it needs to be.

Ethan Wu
Yeah, exactly. And I think for people that were hoping that consumption could stay as strong as it has been and inflation can come back down to 2 per cent, they were kind of betting on like AI to create some huge productivity improvement so we could do more with less.

Robert Armstrong
The robots were gonna save us. But I’m clinging to my optimism. You know, I’m gonna come out here and argue the most likely outcome is still that we get to target on inflation without a recession before the end of next year. We’re gonna arrive. I’m not rule, I don’t think, I’m not saying there’s not tails in the distribution. I’m not saying 100 per cent. I’m just saying if I had to bet today, that’s what I’d bet on.

Ethan Wu
This seems very possible. It seems more possible than, you know, than most people expected.

Robert Armstrong
I’m not gonna let you fudge though, Ethan. I don’t wanna hear about very possible. I’ve made a prediction. I want you to make a prediction. What do you think is happening here?

Ethan Wu
I think I have to stay in the mild recession camp. And, you know, I fully recognise how this could go wrong. But I think when we think about recessions schematically, we tend to think 2020, 2008 — disasters that affect everybody. But there have been a lot of recessions, I think, of the dotcom bust that affect some slice of the country. But how many people who didn’t work in tech felt the 2001-03 recession? Not that many, I’d wager. Mild recessions can be quite mild.

Robert Armstrong
My millions in shares of Kittylitter.com (Ethan laughs) just wiped out in 2001. It was terrible.

Ethan Wu
Yeah. But you know, you could see unemployment tick up to, you know, 4 to 4.5 per cent and two quarters of contracting GDP. Then we reset, we start a new expansion. That would be, I think, in some ways a quite good economic outcome, all things considered, especially how crazy the economy has been since the pandemic. I’d give that maybe just marginal odds over a soft landing, 55 to 45, something like that. But it’s a super close call.

Robert Armstrong
So now all we have to think about is how events can unfold so both of us are wrong. I mean, I guess a hard recession or out-of-control inflation. Those are the things we’re betting against. But we agree that those two ends of the distribution are unlikely.

Ethan Wu
Yeah, you know, it’s scary to even say this out loud on a recording, but the most extreme outcomes look less likely these days, and that’s a good thing.

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Robert Armstrong
OK. Now we’ve thoroughly jinxed the economy of the United States.

Ethan Wu
(Laughter) Furiously knocking on wood. Now that we’ve thoroughly jinxed the US economy, let’s go to Long/Short and see if we can unjinx it.

Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Rob, are you long or short something?

Robert Armstrong
I’m long Walmart. The stock is down 7 per cent today. And maybe the stock has done so well in recent months that maybe it got a bit over its skis. But for all the talk about how Amazon was gonna take over the world and rule all retail, Walmart has proven the durability of the big box retail model, and they have proven that it is possible to build a really good managerial culture — that’s a well-run company that, you know, changes as it has to change and it has its ups and downs. But I’m impressed. And so I think you could do a lot worse than owning a few shares of that one.

Ethan Wu
I also have a long today. I’m going to go long humanity’s collective ability to suss out truth from a morass of information. There is a piece in the New Yorker kind of you’re poking a hole in the narrative that deep fakes were going to destroy our collective ability to interpret the world around us. And it kind of makes a, I thought, a very astute point that garbage information has existed from the dawn of time and, you know, social trust in institutions and, you know, that people talking with other people is kind of how we come to decisions rather than we look at the video and we believe it immediately.

Robert Armstrong
This is probably a good time to tell our listeners that they’ve been listening to two computer-generated avatars for the last 15 minutes. (Ethan laughs) The real Rob and Ethan are at the bar around the corner collecting their pay cheques.

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Ethan Wu
We’re out there busy engineering the extreme outcomes for the economy. We’re plotting the hard landing as we speak. All right, Rob, thanks for being here. We’ll have you back very soon. And listeners, we’ll be back in your feed on Tuesday with another episode of Unhedged. Catch you then.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Jacob Weisberg and Jess Truglia. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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Hey, listeners, some of you may have noticed that Tuesday’s episode had some garbled crosstalk between Elaine and Rob. We’re really sorry about that. There was an issue in audio production. We hope it doesn’t happen again. But if you would like to listen to a corrected version of Tuesday’s episode, you can redownload it right now. The live version should be correct. Thanks for bearing with us.