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Does Amazon's first-quarter 2022 suggest that inflation is about to ease later in 2022/2023?
Amazon (NASDAQ: AMZN) for first-quarter 2022, reported net worldwide sales of $116.4 billion, up 9% year-over-year. The overall growth rate appears low relative to what we witnessed through the pandemic. Nonetheless, as CFO Brian Olsavsky points out, the compound growth per annum since the pandemic began is still around 25%, higher than the rate at which the business was growing pre-pandemic.
Yes, the earnings report didn’t shoot the lights out, but it was still a fantastic report for gaining insights into the US labor market.
Let’s start with the early stages of the pandemic, which pushed the company’s infrastructure to its limits. Locked-down consumers made a beeline for Amazon’s virtual checkout counters. Amazon reacted swiftly, roughly doubling both the size of its operations in terms of fulfillment capacity and labor force. The following commentary from the CFO highlights the company’s response:
“As a reminder, in the second half of 2021, we were operating in a labor-constrained environment. With the emergence of the Omicron variant in late 2021, we saw a substantial increase in fulfillment network employees out on leave, and we continue to hire new employees to cover these absences. As the variant subsided in the second half of the quarter and employees returned from leave, we quickly transitioned from being understaffed to being overstaffed, resulting in lower productivity.”
Notice how the labor force went from a shortage to overcapacity in the second half of 2021. Amazon has a similar challenge in its infrastructure, with excess capacity now present in both the fulfillment and transportation network. According to Olsavsky, it will take a few quarters for the company to grow into the extra capacity. As a result, they have pulled back on their “build expectations.” However, he notes that “many of the build decisions were made 18 to 24 months ago, so there are limitations on what we can adjust midyear.“
In my mind, this is Amazon indirectly acknowledging that its laser-focused planning has been flummoxed by the crazy demand environment! If Amazon can be in this boat, there are probably many others.
The labor market is tight, with employment at historically low levels, although it might partially be owing to businesses hiring well above their needs. Similarly, part of the inflationary pressures may be due to the heightened investments during the past two years. Yes, freight costs – air and ocean shipping – remain elevated. More disruptions are happening because of Covid in China. Still, Amazon’s commentary suggests that there has been a significant pull-forward in both hiring and business investments. And that’s perhaps good news when it comes to taming the inflation dragon!
