Amid repeatedly alarming signals of economic recession, the USA economy continues to show resilience. Is this time the "Walmart Recession" signal going to fail?

Currently, the "Walmart Recession Signal" (WRS) is at its highest level since the onset of the pandemic, triggering a recession alarm. Since the beginning of this year, Walmart's stock price has soared by 80%, while the S&P Global Luxury Goods Index has remained relatively unchanged, with the indicator rising significantly.

The "Walmart Recession Signal" was proposed by former Wells Fargo & Co Asset Management strategist Jim Paulsen, and this indicator predicts economic recession risk by comparing Walmart's stock price with the relative performance of the Luxury Goods Stocks Index.

Paulsen believes that:

As economic activity slows down and recession risks increase, retail purchasing patterns tend to lean towards discount stores like Walmart and away from luxury retailers; therefore, the rise of WRS may signal a potential recession.

However, can this indicator truly predict an economic recession?

"Walmart Recession Signal" has three major limitations.

According to media analysis reported on Thursday, some limitations were found after in-depth exploration of this indicator.

Firstly, the standard used by WRS - the S&P Global Luxury Index is itself controversial. This index uses a complex weighting calculation method, categorizing component stocks into four categories - minimum, medium, significant, or maximum - and then adjusting their Market Cap accordingly. S&P not only considers Market Cap but also introduces a subjective "Luxury Goods Exposure Score."

This leads to significant diversity among the index components, ranging from pure luxury brands to high-end hotels, cruise operators, and even companies like Tesla. Whether such a diverse composition of stocks can accurately reflect the overall trend of the Luxury Goods industry is debatable.

Secondly, the Luxury Goods industry itself is undergoing structural changes. Ultra-high-end brands represented by LVMH, Hermès, and Ferrari are continuously capturing market share, while traditional luxury brands face growth pressures.

However, for about the past year, the entire industry has been in trouble. Against the backdrop of a global economic slowdown, high-end brands are attempting to raise prices, while increasing evidence suggests that Generation Z is not that concerned about authentic brands. These trends manifest in various ways in the Luxury Goods sector and cannot be easily summarized by a single index.

In addition, Walmart's own business model is continuously evolving. The company has recently attracted more high-income consumers and is actively expanding into international retail and high-margin e-commerce. In 2023, Walmart's stock price surged nearly 90%, mainly due to business expansion and improved profitability, rather than pure sales growth.

Paulson recently stated in his Substack column that there are no signs of recession panic in corporate credit spreads. If it weren't for the strange index and complicated industry, his Walmart recession signal might convey the same meaning.

"Sam's Rule" and other traditional predictive indicators have also failed.

From the above analysis, it can be seen that due to structural changes in the Industry, the signal of "Walmart recession" seems unable to accurately predict a recession.

Not only this Indicator, but also traditional forecasting Indicators like the "Sahm Rule" have failed. Claudia Sahm, the proposer of the Sahm Rule, previously announced that the rule has indeed failed and does not prove that the USA economy has fallen into recession.

The reason for the failure is due to structural changes in the labor market. Sahm believes that the rise in unemployment is no longer due to a decrease in demand for workers in the market, but rather due to an increase in labor supply. For example, the surge in immigration to the USA after the pandemic has promoted the recovery of the job market, causing the unemployment rate to rise, which can no longer be used as a reference for recession indicators.