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Well, there was some positive news in
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the latest inflation data, but we are
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still talking about a time where tariffs
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are having an impact on retailers and of
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course that means that there's probably
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impact on the consumer as well. So, what
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is the state of retail at this moment?
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Pleasure to be joined by Gideon
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Bournestein who is an assistant
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professor of finance here at the Wharton
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School. Gideon, great to talk to you.
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How are you today? I'm doing great.
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Thanks for having me. Thank you. And I
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guess let me start there because there
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is so much going on and there is a lot
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of focus on how retailers are dealing
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with this period of time. Uh how do you
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view kind of how the retail sector is
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handling all of this back and forth?
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Yeah, I think so far retail is holding
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up but just barely. I mean it's a very
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hard time with all um tariffs and we
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have consumers um you know also trying
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to understand are tariffs going to go up
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go down all this is just making it very
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hard um for retail overall um for us as
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macroeconomists we're looking at the
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retail sector to understand the overall
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state of the macroeconomy and see
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whether consumer spending is going to go
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down. So I think that's why there's also
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a lot of attention to understand what's
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going on in the retail sector. So what
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are you looking at specifically then? I
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think one of the key numbers there is
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just simply looking at um retail sales.
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So for example, we've seen um in the
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latest report um retail sales in April
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were kind of flat. They were not
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changing um much. We had a few months of
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retail sales going up slightly, but that
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is one key number that we're looking at.
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We're also looking at consumer
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confidence report where um we see the
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numbers there. There was a slight
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increase but numbers are still quite low
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when we're looking at expectations what
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consumer expect um to happen in the
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future. And I think this whole time is
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really um is all about tariffs to some
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extent. That's the number one factor
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that is affecting um retail. Well, and
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and in the latest kind of round of of
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earnings reports that we've seen, it
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seems like you're you're seeing
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companies, retailers at least say that
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they are trying to mitigate the impact
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of tariffs. What that means, you know,
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it could be a variety of different
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things, but I think the consensus is a
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lot of people believe that tariffs
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eventually end up leading to either
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higher costs for the consumer or some
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sort of negative impact.
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Yes. No, it's it's definitely correct.
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When when tariffs are going up, um
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retailers, they're facing different
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choices. Either they're not going to
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change their prices, then their margins
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are going to take a hit, or they're
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going to raise their prices, but then
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they risk losing customers. And then
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they also have to think, how long do we
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expect these tariffs to stay with us? If
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it's something very temporary, we don't
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want to lose customers, so maybe we can
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take the hit. But this uncertainty is
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just it's a very um hard thing to deal
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with for retailers and for many
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retailers. We heard stories about them
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trying to get products in earlier from
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overseas. So it really brings in how the
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supply chain is kind of handling a lot
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of these issues as well. Yes. No, that's
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absolutely true. There's both, you know,
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do we want to frontload? Do we want to
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buy now um as much as we can before
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tariffs may continue to go up? Um do we
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shift the supply chain that may take
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time and is also expensive? Do we move
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um goods that we buy from China to
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Vietnam or Bangladesh? Yeah, those
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things I think retailers are thinking
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about all of these things right now.
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How much then when companies say that
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they are trying to absorb the impact of
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the terrorists, how much can they
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potentially do that and in what kind of
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manner?
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Yeah, I think at the end of the day the
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the margins at the retail sector are not
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um very large. So if tariffs are here to
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stay, it's going to be hard not to um
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raise prices. So, some companies are
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trying not to raise prices and shift,
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but I think that it's it's going to be
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hard. Um, then the play is you're
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looking at the product portfolio of what
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you're offering and you're trying to
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understand um the elasticity of demand
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from the consumer side. You want to make
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sure that the goods for which you're
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raising the prices are not ones that are
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going to scare your customers away. So I
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think there's a lot of attention now to
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understand where can we raise prices
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without losing um as many consumers
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overall. Then I guess with certain items
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which the consumer might be willing to
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put on a credit card to make a purchase
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for the question becomes are they
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willing to do that right now with some
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of the uncertainties that are out there
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in the economy. Yes. I think normally um
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the the retail sector is a bit like the
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canary in the coal mine in the sense
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that we're all looking at it to
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understand where the economy is going
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because it's all driven by how consumers
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what do they feel right it's easiest you
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know if things are bad you're not going
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to cut um your rent you have to pay your
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rent you're going to go to your doctor
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what you're going to do is you're going
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to cut the discretionary spending so
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you're going to cut a lot on retail um
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nowadays it's a little bit harder for us
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to just look at retail and and
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understand you know the impact for the
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macroeconomy because we have tariffs on
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the one hand and then we have consumer
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um confidence consumer expectations on
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the other hands but so both of these
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things are playing a role how has how
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has the kind of shifting target that
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we've seen from Washington DC and
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Capitol Hill on policy played a uh a
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challenging part in this process? No.
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Yes. Uh no, I think it's extremely
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challenging. I think that there is
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uncertainty on what is going to happen.
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We learn one day tariffs in China are
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above 100% the next day back to 30%. So
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it just makes decision making and
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understanding from the retail side what
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is going to be in the future extremely
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difficult and similarly on the consumer
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side um extremely difficult. So when we
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looked at consumer confidence, yes, in
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May numbers were going um up as tariffs
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were you know going down from their
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initial high levels but at the same time
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the overall level is still quite low.
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The expectation number is below 80. So
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it's still you know there's a risk of
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recession with those types of numbers.
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So then what are you most watchful on
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right now? I guess kind of from a
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combined perspective of how companies
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are dealing with this but also the
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consumer is dealing with this.
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Yes. No, I think yeah me myself the Fed
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as well they're monitoring these um you
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know these numbers very carefully to
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understand where things are going.
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Right? We have inflation. Inflation was
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very high you know some time ago. It's
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now starting to go down. It's still in
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not great levels overall. Right? We have
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to make sure that it continues to go
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down. These tariffs that are going to
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affect it as well. At the same time, we
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want to make sure that unemployment is
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not starting to um go up drastically.
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So, it's a very difficult time, I think,
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for the Fed to, you know, to think about
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what are the ideal actions. Gideon,
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great to have you with us today. Thanks
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very much for your time. All the best.
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Thank you so much for having me, Dan.
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Thank you. to Gideon Bournestein who is
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assistant professor of finance here at
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the Wharton School.
