Our first interview of the year is with the ever insightful Ira Kalish, Chief Global Economist at Deloitte. More and more the ever shifting forces of the macro-economy are informing retailers' strategies, and we can't think of a better guest to help us make sense of trends in inflation, interest rates, labor markets, and more.
Our first interview of the year is with the ever insightful Ira Kalish, Chief Global Economist at Deloitte. More and more the ever shifting forces of the macro-economy are informing retailers' strategies, and we can't think of a better guest to help us make sense of trends in inflation, interest rates, labor markets, and more.
In a wide-ranging discussion we learn Ira's outlook on pricing across a spectrum of commodities, whether the US will sink into recession, and how China's surprise re-opening will impact global markets. We also go deep on the challenging labor market and his fascinating belief that some companies are engaged in "labor hoarding." This is truly a can't miss episode.
But first we dip into the week in retail news, including what to make of surprisingly strong US GDP numbers, the continuing strength of most labor markets, and how long COVID is keeping a large number of workers on the side lines. We also unpack Whole Foods plans to add stores and Amazon's jacking up of grocery delivery prices before opining on Wall Street's love for layoffs at Wayair. We close by trying to figure out all the activity in the once sleepy mattress market and why Levi's had a pretty decent quarter when many of its customers are flailing.
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We're headed to Las Vegas in March for another edition of Shoptalk. Retailers and brands can get a Shoptalk ticket for a reduced rate of just $1950 rate here using our special discount code RBREMARK1950.
About Ira
Dr. Kalish is the Chief Global Economist of Deloitte Touche Tohmatsu Ltd. He is a specialist in global economic issues as well as the effects of economic, demographic, and social trends on the global business environment. He advises Deloitte clients as well as Deloitte’s leadership on economic issues and their impact on business strategy. In addition, he has given numerous presentations to corporations and trade organizations on topics related to the global economy. He is widely traveled and has given presentations in 47 countries on six continents. He has been quoted by the Wall Street Journal, The Economist, and The Financial Times. Dr. Kalish holds a bachelor’s degree in economics from Vassar College and a PhD in international economics from Johns Hopkins University.
About Us
Steve Dennis is an advisor, keynote speaker and author on strategic growth and business innovation. You can learn more about Steve on his website. The expanded and revised edition of his bestselling book Remarkable Retail: How To Win & Keep Customers in the Age of Disruption is now available at Amazon or just about anywhere else books are sold. Steve regularly shares his insights in his role as a Forbes senior contributor and on Twitter and LinkedIn. You can also check out his speaker "sizzle" reel here.
Michael LeBlanc is the Founder & President of M.E. LeBlanc & Company Inc and a Senior Advisor to Retail Council of Canada as part of his advisory and consulting practice. He brings 25+ years of brand/retail/marketing & eCommerce leadership experience, and has been on the front lines of retail industry change for his entire career. Michael is the producer and host of a network of leading podcasts including Canada’s top retail industry podcast, The Voice of Retail, plus Global E-Commerce Tech Talks , The Food Professor with Dr. Sylvain Charlebois and now in its second season, Conversations with CommerceNext! You can learn more about Michael here or on LinkedIn.
Be sure and check out Michael's latest venture for fun and influencer riches - Last Request Barbecue, his YouTube BBQ cooking channel!
Michael LeBlanc 00:06
Welcome to Remarkable Retail podcast, Season 6, Episode 3 presented by MarketDial. I'm Michael LeBlanc.
Steve Dennis 00:12
And I'm Steve Dennis.
Michael LeBlanc 00:13
Well, Aloha Steve. I'm back from Maui with a board meeting with the RSPA, Retail Solutions Providers Association. And as you can imagine, it's about 75 years old. And as you can imagine, they think a lot about retail technology. And after 75 years, they're just trying to figure out what the next five years look like in retail tech. Have you? Have you ever been to Maui?
Steve Dennis 00:34
I have. I've been to Maui twice. The first time was for my honeymoon. It's been quite a while, a quite a while ago, and no, I'm no longer married to her. So, I don't know if that was a bad omen or, or something like that. And then we also went with our kids about, oh, my gosh, probably close to 20 years ago. So, it's been a while since I've been there. The highlight of that trip is my kids coming back from having been in the hot tub at the hotel with Arnold Schwarzenegger.
Michael LeBlanc 01:04
Wow. Wow. Okay, I can't top that. Speaking of changes and forecasts and all that stuff. It's our first interview episode of the year. We're starting off with an internationally respected economist to give us both a look at the global forecast and our American forecasts and his answers to our questions might surprise some.
Steve Dennis 01:22
Yeah, Ira Kalish is a guy that I actually met. He, for a number of years would come down to speak at the Dallas Fort Worth Retail Executive Association, he would kick off our year, I was the president there for a while. And I always found it to be one of the most interesting talks because he's got such an in-depth comprehensive knowledge. And, you know, I think particularly, I mean, I think we did, we had, I can't remember if we have this off mic or on mic, towards the end of last year, where we were talking about how much time we spend in our new segment touching on macroeconomics stuff where that was not really something even though I have an economics degree, that's not something frankly, I spent a lot of time thinking about or commenting on over the past few decades. So, I think it's really great that we're, we're getting a real expert on here, rather than the two of us just opinion-ing on things we know a little bit about, but maybe not a lot.
Michael LeBlanc 02:16
Well, I've had the chance to talk to Ira a few times. And what I and what I love about his perspective is he's with Deloitte and a Chief Global Economist. And so he lives with business people. I mean, he often spends most of his time there. So, he's not like, you know, an economist that just looks at charts and data. I mean, he is in it with very senior business leaders. So, he has both perspective and analytical, analytical chops to kind of bring forth very interesting insights. So, we'll get to that right after the news. A reminder to folks that our next time together will be in March at Shoptalk. We'll be podcasting there and the folks, I believe, will be able to see you live on stage as well.
Steve Dennis 02:53
That's true. Yes, we'll, we'll share a bit more about that as the weeks go on. But also, we will have in our show notes, a discount for retailers, if you want to attend Shoptalk. And I would definitely encourage you to do so. I think it's definitely one of the best shows that I've been to, and I've been to, really since they kicked it off. We'll have a discount code in the show notes. So, check that out.
Michael LeBlanc 03:14
All right. Well, let's get to the news. I guess we're starting with a little bit of economics. We don't want to go too heavy on it, because we actually have a global economist with us. GDP numbers and jobless claims around, long COVID. Two things that I think are super interesting. What, what makes you, of what you're hearing?
Steve Dennis 03:29
Yeah, we'll be pretty brief on this. We did an interview with Ira a couple of weeks ago. So, this is data that has come out since, since then. With the US it just still continues to be pretty amazing with all the kind of gloom and doom news stories, layoffs being announced by many, many companies across the last several weeks. The GDP number came in at just under 3%, which is a pretty solid growth continuing in all the news we've been hearing. And jobless claims were down. So again, like we talked about this last week, despite these headlines about all these layoffs, you know, the unemployment picture or the employment picture is pretty, is very positive. There's also a story in The New York Times that I thought was interesting about the very significant number of people that have not been able to return to work because of long COVID. So, you know, there's this whole narrative around people that want to work and, and immigration and you know, all these different reasons for why it is tough to find people. But, you know, aside from obviously, lots of people have died from COVID. And that tends to take you out of the workforce. Unfortunately.
Michael LeBlanc 04:44
I heard an estimate about a half a million people out of the workforce. Now I think America for example, lost over a million people but you know, I guess some of those are, you know, a majority or whatever were seniors not in the work (crossover talk). But there is an estimate of about, you know, half a million people who would have been in the workforce that, unfortunately, are just not there anymore.
Steve Dennis 05:05
Yeah, I think you also and I haven't seen a good number on this. But I have heard some economists mention it while it yes, it's true that many people that died or, or have been incapacitated, were not working. Some of them were, in fact, involved with watching kids while their parents went to work. So, there's also this issue of when your daycare situation changes, for whatever reason, that takes people out of the workforce. So, yeah, I mean, but I think the overall picture here continues to be a very tight labor market, consumers still spending pretty well, though, again, signs that things are, things are slow. I also have got a couple of other things, home sales in the US hit a 12 year low. The pace of home sales tends to affect lots of things, you know, spending on the home. So, we'll see how that ripples through.
Steve Dennis 06:02
We have just started to see, which I think is pretty typical post the holiday season, more layoffs, in retail in particular, you know, we talked, have talked for the last several weeks about the tech layoffs we are now starting to see some more retail layoffs, but not, not massive. And then the last thing that we'll touch on with Ira, so I won't spend much time on it, is the survey of executives that came out last week. It tended to feel like there was, or there's this growing sense that there's less chance of a recession. What we do have is technically a recession. It's not likely to be too deep or too long. But we get into that with Ira. So we'll, we'll tease that a little bit.
Michael LeBlanc 06:36
Let's see, let's talk about Whole Foods. So, we saw the new president of Whole Foods at the last Groceryshop and he was just, just new in the gig. Now they've announced they're going to open up to 30 stores, which is super interesting that I don't think of Whole Foods as a thriving grocer. But what do you, what do you make of this?
Steve Dennis 06:56
Well, the short answer is I'm not sure. You know, we talked in our predictions episode about big things happening at Amazon. And part of that is seeing where they go or don't go with groceries. And you're right, Whole Foods. I mean, we don't get any specific financial data on Whole Foods, because Amazon is very good at hiding the ball. The general sense is Whole Foods has been struggling for a number of years. So, the announcement that they're going to open 30 stores, which is not massive in terms of the total store count, but (crossover talk) that could change.
Michael LeBlanc 07:28
You wouldn't even go to the Capital Committee with that you'd send an email and say I need a bit of money.
Steve Dennis 07:32
It's probably right or a 6, a 6-page memo or whatever they do there at Amazon. But it's also in contrast to what we've been hearing about Amazon Fresh where they appear to perhaps have put those store openings on hold.
Michael LeBlanc 07:44
Wait a minute, aren't there 30 "zombie" Amazon Fresh stores? Am I making, am I drawing a connection there that it shouldn't be (crossover talk)?
Steve Dennis 07:52
Well, I think, I think those Amazon Fresh stores maybe too small to contain a Whole Foods, but it is sort of an interesting, interesting conservation of I don't know, there's some math principle perhaps that, that people understand that I don't. But the other news that's related to Whole Foods, but not exclusively, about Whole Foods is that Amazon announced that they are changing their pricing structure for grocery home delivery. So, it used to be that if you were a Prime member, you would get free grocery delivery, as long as you spent $35. Well, now, you have to spend $150. So, that's a pretty big change. And there's a sliding scale of charges in between. Whether this is just part of Andy Jassy's overall focus on improving profitability, or whether this is something else it speaks to this uncomfortable truth, as I often say, or inconvenient truth about local home delivery is that it's very, very expensive and a lot of it is unprofitable. So, I think it may just be that this is part of as things kind of settle down to more normal spending and a post-COVID issue environment that people are trying to figure out a way to, to merchandise their way to profitability.
Michael LeBlanc 09:07
Let's talk about Wayfair for a little bit. They've been upgraded. You know, they announced they're laying off people and the market loves them.
Steve Dennis 09:16
Yes, yeah. I thought, (crossover talk).
Michael LeBlanc 09:18
Which makes me by the way, the, the, you know, the conspiratorial list and it makes me think that there's a bit of a fever in business right now to lay people off because it looks good to lay people off. Like it's a weird dynamic right now, I think.
Steve Dennis 09:31
Yeah, it's like, you know, bad news is good news. Good news is bad news. It's, it's a, you know, an upside-down world or something here. But what is interesting to me is that many people will know I have been a pretty harsh critic of Wayfair for many years. I wrote a piece in Forbes almost three years ago, basically saying that the valuation of Wayfair was insane. I don't generally like to make stock recommendations, but if you had listened to me and not bought the stock you would have saved yourself a lot of aggravation, because the stock's down like 60% over three years. And the stock has been all over the place and gone down quite a lot like a lot of the online dominant companies this past year. But yes, they announced layoffs, and the stock is up something like almost doubled since that announcement. And that seems strange to me. So, I don't like to recommend stocks. But we are going to get Wayfair's earnings here I think in this next week, and I don't, don't expect it's going to be a pretty, pretty, pretty picture.
Michael LeBlanc 10:39
You know, one of my favorite movies to learn business lessons from is The Godfather. I love The Godfather. There's so many business lessons to take away. One of which is gone to the mattresses. And we're not talking about going into some kind of battle here, but the mattress business seems a bit of a, it seems to be not in a comfortable place to be right now. What do you, what do you make a Serta and Purple and Casper what's going on?
Steve Dennis 11:02
Yeah, there was, there's an unusual amount of news last week, Serta, which is one of the biggest brands filed for Chapter 11. People probably know the Serta brand, but they also own a disruptor brand, I guess you could call it, called Tuft and Needle, which is kind of in the similar vein of Purple and Casper, two brands that have emerged over the past decade. So, that is awesome news. Purple, which was actually doing pretty well, for a while they're publicly traded, they started to run into some issues in the past couple of years, which also seems kind of funny, because quite a lot of spending on things for the home and spending in general. So, I'm not quite sure why that business has become so tough, but they are trying to figure out what their path forward looks like. And we haven't heard much about Casper, other than you know, we've talked about these wobbly unicorns a number of times.
Steve Dennis 11:55
And Casper was a real star in many respects of the disruptor brand world. They were going to open 800 stores, I think they had announced, and you know, all sorts of great things are going to happen and their valuation collapsed. And they've, they've actually been bought out. So, we don't know too much about their prospects other than we haven't heard a heck of a lot about their business. And they are not opening stores, as far as I know. So yeah, it's a, it's a category that was kind of ripe for disruption and attracted a lot of investment over the past decade. But now it doesn't look like the financial prospects of that business are terribly good. So, stay tuned.
Michael LeBlanc 12:38
On the other side of that dialogue, Levi's put out their earnings, one of my former employers, and they're pretty good. So, it's, which is interesting, right. And you and I were talking off mic you, you know, the traditional purview of, of Levi's, for example, has been department stores. That's been,
Steve Dennis 12:52
Right.
Michael LeBlanc 12:53
Generally, a very huge part of their business and department stores aren't exactly thriving. So, what do you think is behind their numbers? I guess they're you know, of course, there's, there's work from home, which tends to be more denim than it does suits. But what do you think? What do you ma-, what do you make (inaudible)?
Steve Dennis 13:07
All right, well, let's get to our interview now with Ira Kalish, from Deloitte. Well, yeah, I think, I think some of it does relate to the broad category dynamics, which had been in their, in their favor, they are moving a bit more to as many of the vendor brands are a direct-to-consumer model. So, that seems to be (crossover talk) a little bit. Yeah. So, they're kind of a master of their own domain controlling their destiny to a certain degree. The other thing, I think, and their gross margin did take a little bit of a hit. So, it was not an amazing set of financial results. But you know, a lot of the problems in the department stores is, is they get stuck with the merchandise, right, not necessarily the vendor.
Michael LeBlanc 13:50
Right.
Steve Dennis 13:51
So, this is another thing, I guess, as we go forward, you know, it gets back to its kind of the flip side, I guess, of having pulled forward or a different angle on having pulled forward demand. You know, if retailers are sitting on all this inventory. What does that mean for shipments from vendors going into this year? So, they did not, Levi's in particular did not comment on that. But I think that's just another, another factor of how much stuff will the vendors be producing if the retail partners have to still work through a fair amount of inventory, at least over the next quarter or two. So, compared to a lot of the doom and gloom kind of earnings, we've seen,
Michael LeBlanc 14:33
Pretty good.
Steve Dennis 14:34
Others that are actually pretty solid. I think Michael and I think because we know you a little bit that you're, you're kind of a famous guy around the retail circles in the business world but there are perhaps a few people that may not have heard of you. So, would you mind just kind of telling us a little bit about your, what, who you are, what you do, your professional journey and those sorts of things.
Ira Kalish 14:52
Oh, well, I'm the Chief Global Economist for Deloitte, which is the world's largest professional services firm, and my job is to write and speak about economic and geopolitical trends as they affect business. And I advise both our leaders and our clients on those issues. But I do have a bit of a background in retail in that for many years, both at my current firm and at a previous firm, I've been involved with the retail practice, but as an economist advising retailers and their suppliers about how the economy affects them. So, I've been doing that a long time, which is, I guess, why the NRF invites me to come back.
Steve Dennis 15:36
Well, we were remarking recently, I've been doing this podcast for a couple of years. And the number of times we have started off talking about macroeconomic factors, as opposed to kind of specific retail issues is quite extraordinary. So, we love having the opportunity to,
Michael LeBlanc 15:54
Yeah, it's quite often.
Steve Dennis 15:56
To have you on to kind of get some perspective on that.
Ira Kalish 15:58
Okay.
Steve Dennis 15:59
Maybe because we're here at the beginning of the year, we can start at the big picture. And can you just kind of paint your sense, both from a US perspective, but I do have quite a lot of folks that listen from all over the world, what are, what are some of the key things you're looking at? What are some of the key trends and forces that you think retailers should be paying attention to?
Ira Kalish 16:15
Well, I think we've just come off of a very disruptive year that saw the first major land war in Europe since World War II, a massive supply chain disruption, a shortage of labor, a huge surge in inflation, and about being faced by central banks. I think this coming year will be characterized to some extent by either a stabilization or reversal of some of those trends. So, for example, I expect inflation, especially here in the US to come down significantly over the course of the coming year, it's already come down, it peaked in June at 9.1%.
Michael LeBlanc 16:50
Right.
Ira Kalish 16:52
In December, it was 6.5%. So, it's, we're moving in the right direction.
Steve Dennis 16:59
But just, because I probe on that a little bit, but not necessarily to the, because I think the Fed is trying to get to three or below is that,
Ira Kalish 17:05
Well, the Feds formal target is and has been 2%. But they don't look at 2% as a peak, they look at it, look at it as an average. So, if it averages 2%, over the next five years, they'll be happy.
Steve Dennis 17:14
Okay.
Ira Kalish 17:15
But I think there has been progress both because some of the underlying factors that drove the inflation like supply chain disruption, and higher energy prices have reversed, but also because the Fed has tightened monetary policy, and that has weakened the US economy. And we've seen the same thing happen in other countries. So that too, should help to bring inflation down. The real question is, can the Fed get inflation down without causing a recession?
Michael LeBlanc 17:46
Right.
Ira Kalish 17:47
And my view is.
Steve Dennis 17:49
And the answer is?
Ira Kalish 17:53
Well, I think there's a, I think there's a pretty good chance we'll in the US, at least will avoid a recession. I don't think that's true in say, Canada or Western Europe. But I do think that even in Europe, while they, I think they will have a recession, it will be a moderate recession, not a deep one.
Michael LeBlanc 18:10
I want to probe on that a little bit, as Steve would say, because, you know, there's a couple of factors that drive. Let's just talk about food, for example, food-inflation. I mean, there's some things that have come and gone. Obviously, the Ukraine War drove up the price of everything from fertilizer to wheat. That's not over with. And we also know that climate change, you know, you're from California, what happens in climate change, I mean, you don't want all your water all at the same time, even going through a drought, I mean, these things are key drivers of food, -inflation, but from your perspective, all the other factors taken into account should have some moderation on at least that element.
Ira Kalish 18:42
So there, there continues to be pretty high food-inflation. That's true, both here in the US and in Europe. And that, in part, is a reflection of the war in Ukraine, which disrupted production and distribution of a lot of grain and fertilizer.
Michael LeBlanc 18:53
Yeah.
Ira Kalish 18:54
Although in fairness, an index of global food prices has come down from the peak is still relatively high, and that, (crossover talk).
Michael LeBlanc 19:07
There's still a lot of people buying from Russia.
Ira Kalish 19:09
Right.
Michael LeBlanc 19:10
Right, in other parts of the world. So, it was,
Ira Kalish 19:03
That's right.
Michael LeBlanc 19:05
That there wasn't as, in a good way, we didn't see the kind of famine that we were worried about in a not so good way. It's still supporting. (Crossover talk) you know,
Ira Kalish 19:20
I'd be more worried in about a year from now, because there was a huge disruption of production and distribution of fertilizer, and that may have an impact on food production next year. And that in turn, could affect whether there's famine in some places or how high food prices are. So, that's one area where I'm not optimistic. But if you look at all the other components of price indices, they're, most of them are moving in the right direction. Energy prices are down, and I expect it will go down further. Durable goods prices are actually falling. We've seen a big drop in the prices of used cars, which is important because the surge in used car prices in the past two years was massive, and at one point was contributing a third of overall inflation.
Steve Dennis 19:37
A third.
Ira Kalish 18:38
Yeah.
Michael LeBlanc 18:39
Wow.
Steve Dennis 18:40
I didn't realize it was so high.
Ira Kalish 18:53
That's, that's over. The only area where we still have a lot of underlying inflation other than food is in non-food, non-energy services. And that, the largest part of that is the cost of housing, and housing prices, their contribution to inflation, comes in a lag. So, last year, we saw a big increase in house prices, we're now seeing the impact of that on the inflation rate. But now house prices are falling. So, by a year from now, the lagged effect will be to see a decline in the residential component of the consumer price index. And that will be one of the factors that will bring inflation down.
Michael LeBlanc 20:56
Interesting and last time, you and I spoke, we took each other on a world tour,
Ira Kalish 21:00
Yes.
Michael LeBlanc 21:01
Of economies, we had the luxury of a lot of time. And we've spoken on this recently. So, since we last spoke, which was in the fall, you know, take us through a little bit, there's been some changes, right? So, China has moved away from the zero-COVID policy to something else. Steve, you and I were talking about it on the podcast,
Steve Dennis 21:15
As you were telling me I was wrong about what I believe.
Michael LeBlanc 21:18
Well, we were just wondering what the effect would be on inflation and other things. The war in Europe continues. But you've already talked about the American economy, not thinking about a recession. But any updates on that, like, what do you think of what's happening in China and its impact?
Ira Kalish 21:34
Well, it is interesting. I mean, if you had asked me a few months ago, I would have said, it's unlikely that China was going to significantly ease the COVID restrictions,
Michael LeBlanc 21:43
Sure.
Ira Kalish 21:44
I thought it would be a loss of face. And I thought they were determined to see this thing through. And then there were public protests. And then the Chinese government did a huge about face. I think, I suspect, they're very concerned about the economic impact of the zero-COVID policy, it was substantial, economic growth last year was really slow. So, now they have completely removed the COVID restrictions. Initially, this has a negative effect on the economy, because there's been a huge surge in the number of infections, it will be a big number of deaths. And that has suppressed mobility, which in turn, hurts consumer spending and industrial production. So, I expect that in the first quarter of this year, Chinese growth will be very low or maybe negative. But COVID comes in waves. And when this wave is over, there'll be a rebound. There'll be a lot of pent-up consumer demand, which will be activated. So, there are some people saying that China will experience really rapid growth this year. That's plausible, but I don't think it's likely because I think there are other headwinds.
Michael LeBlanc 22:54
(Crossover talk). Yeah, a little bit on the demand side, I suspect.
Ira Kalish 22:57
Well, the biggest headwind is the housing market. The problem is that over the past 30 years, there was too much investment in housing, a lot of it fueled by debt,
Michael LeBlanc 23:05
Right.
Ira Kalish 23:06
And housing was seen as a form of saving for households because they didn't like the low returns that they got in bank deposits, and they looked at equity markets as a casino. And so, they invested in housing and to such an extent that about almost a third of all residences in China are unoccupied because they were just simply built and purchased as,
Michael LeBlanc 23:28
Wow.
Ira Kalish 23:29
Speculative investments.
Steve Dennis 23:32
Wow.
Ira Kalish 23:33
But now the government has taken steps to reverse that, which I think makes sense in the long run. But in the short term, there's a cost. And one of the costs is that people have seen a loss of wealth. And so, they're saving more and spending less and from a retail perspective, it hurts. And that will be one of the factors that will suppress economic growth for the next few years. But if you're a global retailer and you source goods from China, I think China will still be an important place to source goods. But given the disruptions we've seen in recent years, both political and public health, I think a lot of retailers will want to assure greater resilience of their supply chains by diversifying their sourcing more and especially given that in China labor costs have gone up a lot. China is no longer the low-cost place.
Michael LeBlanc 24:28
Yeah, right.
Ira Kalish 24:29
Labor arbitrage will not be the major factor in decisions to produce in China.
Michael LeBlanc 24:37
Scale is important, right? So, Vietnam, Mexico, countries like that are not winners from that line of thinking. Yeah?
Ira Kalish 24:42
So, for US companies, I think Mexico is the big winner. I remember 20 years ago after NAFTA, there wasn't as much investment in Mexico as people had expected, in part because labor costs were so much lower in China. And China had just joined the WTO and seemed very attractive. But now, labor costs in Mexico are lower than in China. Mexico has free trade with the US, it has decent political relations, it has lower transport costs, (crossover talk) because of close proximity,
Michael LeBlanc 25:02
Well, you can drive a truck there.
Ira Kalish 25:05
You can, you can't do that to China.
Michael LeBlanc 25:08
Yeah.
Ira Kalish 25:09
So, I think, we will see a shift of a lot of manufacturing that was in China to Mexico.
Michael LeBlanc 25:12
Interesting. Can we talk a little bit about the labor market, and in particular, its relationship to inflation?
Ira Kalish 25:16
Sure,
Steve Dennis 25:17
But also, just the issue, which we hear a lot, I'm sure you hear a lot of just the difficulty of finding people,
Ira Kalish 25:20
Right.
Steve Dennis 25:21
Or at least the right type of qualified person for certain kinds of, kinds of jobs. The Fed seems like one of their, maybe this is interpretation on my part, but, you know, one of their indicators, is, is to get unemployment up a little bit, but not too much,
Ira Kalish 25:29
Right.
Steve Dennis 25:30
As, as a way of perhaps, but (inaudible) can you unpack that for us a little bit to where you see that going?
Ira Kalish 25:41
So, we are experiencing both here in the US and in many other industrial countries a shortage of labor. During the pandemic, there was a sharp drop in labor force participation, it has rebounded, but not entirely. In part, it was because a lot of older people retired early during the pandemic, they're not likely coming back, in part because some parents found it difficult to work, and to take care of children who weren't in school full time,
Michael LeBlanc 26:08
Right.
Ira Kalish 26:10
The kids are back in school now. But not all those parents have returned to the labor force. Some people dropped out because of a skills mismatch. It just didn't have the skills for the kinds of jobs being created in this new era. And so those factors, and then of course, there are still a lot of people who are sick because of COVID.
Steve Dennis 26:44
Right.
Ira Kalish 26:45
On any given day, there's about a million people not working because of COVID related illnesses.
Steve Dennis 26:59
And people with long-COVID that have debilitation that,
Ira Kalish 27:01
It's a big number, and then (crossover talk) on top of that, we had a big drop in immigration, it did rebound in 2022. But not enough to offset the huge drop we saw over the last several years. So, that contributes to the shortage of labor. I hear that from clients I speak to, in many industries in agriculture, construction, high technology, leisure and hospitality and even retail. So, the thing that's interesting is that when you have a shortage like that, with high inflation, you would expect that businesses competing to get workers that can't find will drive up wages,
Steve Dennis 27:45
Right.
Ira Kalish 27:46
And they have but not as much as you'd expect. So, on balance for the economy as a whole, wages have not kept pace with inflation,
Steve Dennis 27:51
Right.
Ira Kalish 27:52
And that's true here in the US, it's also true in most other industrial countries and that means a real decline in purchasing power by consumers, which hurts retailers of course. Here in the US that has at least been offset by the fact that people can dip into the massive pool of savings they accumulated during the pandemic. And so, retail spending has remained relatively steady. Not true in Europe, where it's been declining. But from the Feds perspective, the good news is, we haven't seen the kind of wage price spiral that would make inflation more difficult to fight. And that may reflect the fact that many businesses expect inflation to come down. They buy into the argument the Fed is making that they will get this down quickly.
Steve Dennis 28:41
Yeah.
Ira Kalish 28:42
And so, I think many businesses may be reluctant to get stuck with permanently higher wages, which is why many of them are doing things like retention bonuses or investing in labor saving and labor augmenting technologies.
Steve Dennis 28:53
Right.
Ira Kalish 28:54
To boost the productivity of their workers. The danger is that as this labor shortage persists, especially if participation and immigration remain low, that even after inflation comes down, wage gains will still be substantial. And that could prevent inflation from getting all the way down.
Steve Dennis 29:18
Right. Right.
Ira Kalish 29:20
And it could also affect what the Fed does. And certainly, from an employer perspective, that might mean it makes a lot of sense to invest in ways to boost productivity, because, because labor costs in real terms are likely to go up.
Michael LeBlanc 29:35
I wanted to get your opinion on these demographic changes, even without COVID that we're going to happen to the labor market. So, as we've described, you don't think that the labor market is going to clear as your economists would say, but that's multi, that's multi-year. You know, it wasn't just co-, maybe COVID accelerated it obviously took people out all the things you described, but it was common anyway, in some of these in America, certainly in Canada.
Ira Kalish 29:56
Well, for demographic reasons. I mean, we are now seeing a declining working age population.
Michael LeBlanc 30:02
Right.
Ira Kalish 30:03
Actually, here in the US, absent immigration, the overall population is declining. So, we still have a very low birth rate. And we would, in my view, benefit greatly from boosting immigration significantly. But politically, that's a hard argument to make right now, because it's a very fraught political issue. So, I think my expectation is that the labor shortage will persist, because of the lack of migration, because of the onerous demographics. And because evidently, a lot of working aged people have made the decision that they're reluctant to work unless it's attractive to them.
Steve Dennis 30:50
(Crossover talk). What is that, you know, I, there's part of me that and I don't want to get into political stuff. But I know there's kind of a narrative from one side of the political aisle that people just don't want to work anymore like that sort of this, this, talking point. And I don't think the facts necessarily support that, you know, as the key theme. But even aside from that, I mean, there clearly do appear to be people that aren't wealthy, necessarily or not incapacitated, that have elected, not to, not to work. And it seems to me, like at some point, unless they're all living in their parents’ basement indefinitely, that there's going to be some pressure on some of those people that get back into, into the labor force,
Michael LeBlanc 31:33
Or is that into the gig economy? Because I mean, I've taken a couple of Ubers today where clearly people said, Hey, listen, I don't need to, you know, I work when I want to work and I make okay money.
Ira Kalish 31:42
I think there are probably a lot of people who during the pandemic, realize that, that maybe they didn't have the quality of life that they wanted in the jobs they had,
Michael LeBlanc 31:52
Do you think it opened their eyes, like COVID? In some ways they opened their eyes to say wait there's a different way to live.
Ira Kalish 31:56
Yeah, it's possible. It's possible. I mean, certainly, we had this major shift toward office workers working at home. And now a lot of companies are saying, come back.
Michael LeBlanc 32:06
Yeah.
Ira Kalish 32:07
And they don't want to come back. And I mean, I was recently in Silicon Valley, talking to some tech companies. And of course, living around there is really expensive. And I heard stories about how a good employee will come and say, I love working for this company. But I don't want to live here. I want more space in Idaho, or (crossover talk) in Canada.
Michael LeBlanc 32:31
Yeah.
Ira Kalish 32:32
And they want to move there but still work for the company remotely. And then the company has to decide, are they going to have a budget for travel, so that this person can come back to the office, (crossover talk).
Michael LeBlanc 32:38
Right or somebody and a couple moves for a reason. And then that person can, (crossover talk), There's an upside to that, because it reduces any kind of friction in labor. I talked to retailers in small towns, who said, we would never have a chance of getting this person working with us in our IT group. Now, he doesn't have to be here anymore. It was always technically possible, but culturally difficult. I had this great, this great story about this retailer and, you know, in Canada, where I'm from immigration is quite high, right?
Ira Kalish 33:06
Right.
Michael LeBlanc 32:07
400,000 per year by our population. So, this retailer was telling me the story that they were looking for a technologist. There was a recent new Canadian in a store, way out on the other side of the country. And he happened to mention that he was, you know, he came over from, I think it was from India, and he was a technologist, he was the perfect person for that job. Now, in an ordinary circumstance, they would not, it wouldn't make sense to pick them up, move his family and move them to the other side of the country. A day later, he was out of the store working at home and working for this company, and they had solved a big problem. I mean, it was such a, you know, it was an eye-opening story for me. And I got to thinking there's that upside to that labor mobility, I guess we could call it.
Ira Kalish 33:40
There is an upside. And your costs in terms of property are lower. But many executives have said to me that the problem is getting people to have a sense of the (inaudible) core to be part of an organization. Productivity could be an issue. I mean, you gain productivity, perhaps through the use of the technology, but you might lose productivity, or if people are spending half a day, just looking at their phones on social networks,
Michael LeBlanc 34:50
Or at least not a, let's just say at least not aligned with the same cultural,
Ira Kalish 34:53
Right.
Michael LeBlanc 34:54
Queues of the company.
Ira Kalish 34:57
Right. So it's, you know, it's kind of an open question right now, we're, we're in new territory. And we're clearly moving in a different direction. If you look at how businesses in this country are spending their money, their capital expenditure money, it's not on structures, like office buildings, or shopping centers. It's on technology, it's on, it's on software, it's on research and development. So, that kind of signals the direction we're going.
Michael LeBlanc 35;06
Interesting.
Steve Dennis 35:07
Yeah. So, when you and I and I imagine you don't, you're not a strategy consultant. So, you're not necessarily telling retailers what they should do. But as you try to get them to think about where they should be focusing their energies. In light of how the macroeconomic picture is unfolding, or at least the, the possibilities for the balance of the year and beyond. What are some of the key things you do?
Ira Kalish 35:27
Well, I mean,
Steve Dennis 35:29
And would it depend on that sort of retail or (crossover talk)?
Ira Kalish 35:35
Right. I mean, I've had clients in multiple industries ask me, how do I prepare for this downturn? And my answer is to prepare for the rebound, for the recovery. Because you know what to do in a downturn, you've been through this before, you've cut your costs, you're careful about capital expenditures, maybe you slow down hiring or reduce payroll. But most recessions last eight or nine months, and most recoveries in recent years have lasted nine or 10 years, you can weather, you can weather a recession, most companies do.
Ira Kalish 36:04
And when it's over, you want to be prepared for the recovery that's coming, especially given that this time, the nature of the recovery will be different than in the past, we will have a labor shortage, we will still have some degree of supply chain disruption, we will still have unknown geopolitical disruptions, we will have climate change as a big issue. Different types of government policy with respect to industry. Being prepared for that is important to be competitive. And that's why I think it makes sense now, rather than at the end of the downturn, to invest in ways that enable you to be prepared. And I think to some extent, companies are doing that. Here in the US, they continue to hire, you hear from business executives, recession is coming, look out. But you know, watch what they do, not what they say. Because they're, they're still (crossover talk) actually hiring.
Michael LeBlanc 36:48
And normal, whatever that means the behavior in that situation and to start laying off. And we have seen some layoffs in the tech sector, of course,
Ira Kalish 36:52
In some industries. Yeah.
Michael LeBlanc 36:55
But nor-, but it's not normal. Normally, you'd be really girding for let's, let's build some cash. Let's keep that powder dry. Let's, let's thin out.
Ira Kalish 37:03
That's right. And I suspect that, to some extent, this is hoarding of labor. That,
Steve Dennis 37:10
Yes, I've heard, I've heard that as a theory.
Ira Kalish 37:12
Yeah, I mean that's my theory for what it's worth, but
Michael LeBlanc 37:16
Quite a lot, (Crossover talk) if you assume that there will be a persistent shortage of labor. And you assume there'll be a recovery in another year or so. When that recovery comes, you don't want to get stuck without the labor you need as the economy starts to grow.
Michael LeBlanc 37:24
When the music starts playing again, you're like, you'd be better,
Ira Kalish 37:30
You'd wanna have your dance shoes on.
Michael LeBlanc 37:34
Right.
Ira Kalish 37:35
So, even if it means some losses now, because you may not be fully utilized in those new workers, you're hiring now at least you'll be better prepared. And the same is true with business investment. You know, we've seen a substantial tightening of monetary policy by the Fed, in part that's meant to compel businesses to slow down capital expenditures that are interest sensitive. But many businesses are cash rich right now.
Michael LeBlanc 37:45
Right.
Ira Kalish 37:46
Interest rates are still historically low, even after monetary tightening. And businesses may in fact, be focused on the longer term rather than the short term. So, we do continue to see some growth of business investment. And I think that may reflect businesses thinking about the long term.
Steve Dennis 38:27
Can we talk a little bit about and you alluded to this earlier, the consumer balance sheet, huge cash stores or savings rates, that reduction so forth, during the height of the COVID crisis. I saw some data recently about, I guess, unusually high debt spending during the holiday season. I don't know if that comports with your data. Obviously, there seems to be a pretty good cushion. But at the same time, it seems like that could deter-, that could deteriorate relatively quickly in a rising interest rate environment, the cost of carrying balance and credit card balances and so forth (crossover talk) be significant.
Ira Kalish 39:05
So, there was, you're right during the holiday season, there was an increase in credit card usage in the US. So, people are now having reduced their debt and are now willing to increase it again, to some extent. We're not in the same situation we were back in 2007, and eight. That was a situation created when we had had a whole decade of people taking out home equity loans against the rising value of their houses, often people who had poor credit. And then when house prices fell, they were in trouble. That's not the situation now. We've had a bit of a housing boom, but it was entirely a boom for people who have good credit. The banks have much better capital buffers now than they did 14 years ago and consumer debt service payments as a share of income are still relatively low. So, I don't think that today, there are the kind of systemic risks to the financial system, stemming from consumer debt that there was back then. That's not to say, you know, if we have a deeper downturn than I'm expecting, you know, certainly there'll be a significant number of people who will run into trouble.
Steve Dennis 40:26
Yeah.
Ira Kalish 40:27
There's no question, especially if people lose their jobs. But I don't think it will be a systemic threat to the system that has happened in 2008.
Steve Dennis 40:37
Right.
Michael LeBlanc 40:38
Well, listen, it's been such a treat to have you on the mic and meet you in person. We're here at the NRF Show. And it's been such a great exploration and I can't think of a better way to kick off our season, as we look forward into 2023, with your insights, the global perspective, the (inaudible) perspective. So, Ira, thanks so much for joining us on the Remarkable Retail podcast. Well, thank you. It's been a pleasure.
Michael LeBlanc 40:56
Fantastic. If you like what you heard, please follow us on Apple, Spotify or your favorite podcast platform so you can catch up with all our great interviews. Including, Organized for Growth, our interview with Satish Malhotra, CEO of The Container Store. New episodes of Season 6 presented for another season by our friends at MarketDail will show up each and every Tuesday. And be sure and tell all your friends and colleagues in the retail industry, all about us.
Steve Dennis 41:17
And I'm Steve Dennis, author of the best-selling book, ‘Remarkable Retail: How to Win & Keep Customers in the Age of Disruption’. You can learn more about me, my consulting and keynote speaking at stevenpdennis.com.
Michael LeBlanc 41:33
And I'm Michael LeBlanc, Consumer Retail Growth Consultant, keynote speaker and producer and host of a series of retail trade podcasts including this one. You can learn even more about me on LinkedIn, and you can catch up with Steve and I in person at Shoptalk in Vegas, March 26. And a month later in Barcelona at the World Retail Congress, April 25.
Until then, safe travels everyone.
SUMMARY KEYWORDS
people, retail, year, inflation, business, bit, talk, spending, recession, retailers, China, long, economist, layoffs, stores, prices, pandemic, disruption, big