“Life is like dancing. If we have a big floor, many people will dance. Some will get angry when the rhythm changes. But life is changing all the time” – Miguel Angel Ruiz
A “rolling recession,” as some have described the current economy, is like a dance of ever-changing business dynamics. It happens when a downturn selectively impacts only a portion of the economy, setting it apart from the traditional view of a uniform economic decline and may explain the overly negative view of the economy. In the post-COVID environment with elevated inflation and an aggressive Fed, it might have been too easy to mistake the pieces for the whole, especially where consumers have been hit hardest.
We haven’t witnessed a widespread economic decline as industries expanding have more than offset sector weakness. The past few years have witnessed extremes where certain industries grappled with severe recessionary challenges while others surged to unprecedented heights. As the economic music continues to play, we anticipate markets to sustain an upward trajectory, driven by a rolling expansion: sectors accelerating as they recover which should more than offset other sectors beginning to decelerate.
At the onset of the pandemic, the world witnessed a seismic shift in lifestyle, propelling the growth of online retailers, food delivery services, streaming platforms like Netflix, and producers of personal protective equipment. In stark contrast, industries such as hotels, tourism, restaurants, and live entertainment suffered staggering setbacks that some businesses did not survive. As the world briskly emerged from the pandemic’s grip, new complexities emerged, including disruptions in supply chains and a long shadow of inflation.
As businesses began to recover, an interesting pattern came to light – a cyclical ebb and flow between recessions and expansions across different sectors. Industries that had been dormant during COVID-19, like bars, casinos, and airlines, saw a resurgence in activity as the consumer satisfied pent up demand. Concurrently, the manufacturing sector faced unique challenges with supply shortages hampering production. This led to a significant drop in new car production, sparking a surge in demand for used cars and an unexpected jolt in their prices.
Some of the biggest outliers during the pandemic now find business conditions returning to normal. A case in point is the Clorox Company, known for its cleaning products. Pre-COVID, management carped about predictable consumer elasticity, whereby when the company raised prices marginally customers purchased slightly fewer goods. Management referred to this as, “post-pricing bumpiness.” However, the pandemic disrupted this equilibrium entirely as bleach suddenly became the new Barbie. Demand for cleaning products surged to unprecedented levels, followed by supply chain disruptions that left store shelves bare and precipitated a steep decline in sales – a vivid tale of economic turbulence. Looking toward next year, management is again bemoaning consumer elasticity and expects Clorox to return to its typical mid-single digit growth.
American Airlines also embarked on a rollercoaster ride but with the opposite fortune. Before the pandemic, the company enjoyed years of steady sales growth in the US, though international segments faced challenges due to the strong dollar. The pandemic upended the industry resulting in massive losses. The CEO noted “this is a very fluid situation” as the company suspended its financial guidance. A gradual recovery ensued in 2021, propelled by government stimulus, and subsequent years brought remarkable growth with record-breaking results. Another testament to the cyclical oscillations that characterize economic cycles.
Looking ahead, the perpetual rhythm of the rolling recession, or expansion, continues. Given the current economic outlook, it appears this dynamic will persist: as one segment of the economy falters, it will be more than offset by the revival of another, an ongoing process exemplified by the diverging prospects of pharmaceutical contract manufacturers and the advertising industry. Having ramped up capacity to deliver COVID-19 vaccines, pharmaceutical manufacturers are grappling with excess capacity and navigating debt covenants. Meanwhile, the advertising industry, which ground to a halt in the second half of 2022, is enjoying a nascent recovery that is expected to accelerate in 2024. Though notable victims included the giants Meta and Alphabet (parent of Google), I like to view ad demand as a good gauge of small business health. Shocked by the rapid increase in interest rates, businesses, particularly small ones, hit the pause button. As the advertising facet of the economy recovers, it hints at a potential resurgence of small businesses, which is consistent with our House Views recommendation to overweight Mid & Small Caps.
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For many companies, things are starting to feel familiar again – almost like it’s 2019! This is a positive sign after the rapid recovery of 2021 and the challenges of 2022. Exogenous pressures are abating, though still exist. When you look beyond the headlines at factors that impact the real American economy, things seem more manageable. We’ll continue to see extreme outliers, but they are emblematic of the broader trend – the phenomenon of a rolling recession. It speaks to the multifaceted nature of the economy, where sectors move and sway in an intricate dance of expansion and contraction. As the ever-evolving dance of the economy continues, one intriguing question comes to mind: Could the multitude of industries that have weathered recessions now pave the way for an era of rolling expansion?
