Amazon shows us what a soft landing looks like

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Whether the US economy can pull off a soft landing continues to preoccupy investors. To see how this might be possible, consider Amazon.com, which arguably achieved this goal.

Amazon’s e-commerce business unit essentially weathered a recession in the first half of 2022 as consumers shifted from buying goods online to spending on activities like travel and dining. But the retailer has managed to respond to rapidly changing consumer behavior by adjusting its warehouse staffing and tapping into other less volatile parts of its business empire. While there’s no guarantee the U.S. economy as a whole can reduce activity without triggering a more painful crisis, Amazon’s rebalancing holds some useful lessons.

In earnings released last Thursday, Amazon reported slowing sales growth and its second consecutive quarterly loss, which included a writedown of the company’s stake in electric vehicle maker Rivian. Most of the weakness in the company’s core business occurred on the e-commerce side, which found itself earlier this year with more staff and warehousing capacity than needed. The company had made investment decisions in 2020 based on the initial surge in demand after the onset of the Covid-19 pandemic. By the time this capability went live in early 2022, consumers had begun to scale back their purchases of certain products.

As a result, Amazon eventually began to focus on reducing costs and increasing productivity in warehouses. Because Amazon has such high labor turnover — more than 100% per year for warehouse workers — it didn’t take long to cut staff. Amazon employed about 1.5 million people at the end of June, down about 180,000 from the first quarter peak. On its earnings call last week, the company said workforce resizing was largely complete by early May.

But Amazon, like the rest of the US economy, doesn’t just move packages between warehouses, trucks and homes. Revenue from Amazon Prime subscriptions, advertising and Amazon Web Services’ cloud computing business all grew double digits year-over-year in each of the first two quarters of 2022. bolstered revenues despite the slowdown in e-Commerce. Amazon’s stock price jumped 10% on Friday in response to the latest results.

Currently, Amazon’s workforce is stable but likely to increase as e-commerce machines prepare for another busy holiday period. And the company says it will redirect more of its capital spending to the lucrative cloud business and content for its Prime Video product. E-commerce spending is expected to grow more cautiously.

Amazon’s story is a microcosm of the hope people have for a soft landing in the US economy over the next few quarters.

Parts of the US economy are currently in recession. Housing construction has slowed in recent months as buyers retreated in response to rising mortgage rates. Retailers are focused on reducing their high inventory levels rather than restocking their shelves. The auto industry is partially paralyzed as it waits for enough semiconductors to put into vehicles to meet consumer demand. And segments of the tech industry are cutting spending to adjust to the less exuberant investor environment.

Yet, for now, the rest of the economy is strong enough to sustain job growth. Airlines are always trying to recruit staff. Consumer demand for travel and leisure remains strong. State and local governments have budget surpluses and are still trying to recover jobs that have been lost during the pandemic. A massive infrastructure bill passed by Congress will drive hiring and investment across the country.

The question is whether these latter categories are strong enough to compensate for weakness in important sectors of the economy, but not so strong as to keep inflation high. Markets have become more optimistic about this possibility over the past month, and why not? If Amazon can lose 10% of its workforce in a few months without wasting time – and without this loss affecting the entire labor market – anything seems possible.

More writers at Bloomberg Opinion:

Yellen’s legacy is being eroded by inflation: Jonathan Levin

Consumer giants are more like Walmart than they think: Andrea Felsted

Amazon’s private label business is a losing proposition: Trung Phan

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have an interest in the areas he writes about.

More stories like this are available at bloomberg.com/opinion

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