Why Amazon is a key recession indicator: Investment expert

Evolution VC Partners founder Gregg Smith argued that Amazon is a key recession indicator and that the company’s upcoming earnings report will be "very telling" of what's going on in the global economy.

Speaking on "Varney & Co." Wednesday, the investment expert stressed that "Amazon’s dialogue and what they tell investors in about a month’s time will be very telling of what’s happening with the economy."

He said that he believes the company’s earnings release "is going to give us an interesting purview into the consumer" and "what’s happening with consumer spend."

"Their Amazon Web Services business, AWS, which is a $60+ billion behemoth, is going to tell us what’s happening with corporate spend. Are we seeing companies begin to dial back on their spend and look to cut cost?" he continued. 

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He went on to note that the tech giant’s "massive media business, which does in excess of $30 billion in revenues," will shed light into "what’s happening from the enterprise in the corporate customer in terms of dialing back spend."

Smith stressed that "the big question" lately is whether a recession is inevitable as inflation sits at 40-year highs and as some corporations have started to downsize as the Federal Reserve attempts to tame the scorching-hot inflation by increasing rates.  

A recession refers to a contraction in gross domestic product (GDP) activity, the broadest measure of goods and services produced across the economy, for two consecutive quarters.

Smith provided the insight on Wednesday shortly after it was revealed that GDP activity declined at a worse-than-expected 1.6% annual pace in the first quarter, according to the Commerce Department’s final reading. The figure is slightly higher than the department’s first and second readings. 

Many economists and analysts are wondering whether the Fed can successfully engineer the elusive soft landing — the sweet spot between tamping down demand to cool inflation without sending the economy into a downturn. Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.

Earlier this month, the Fed raised its benchmark interest rate by 75-basis points for the first time in nearly three decades as policymakers intensified their fight to cool inflation. 

Federal Reserve Chairman Jay Powell earlier this month sought to assure Americans that higher rates will not trigger a recession and that tightening policy is necessary in order to tame prices.

Smith noted on Wednesday that he is a venture investor and that, as he analyzes his portfolio of more than 200 private companies, he realized that "there’s a very big difference in what they hear and what they see."

"Many are seeing incredible business, particularly the ones that deal with the consumer, that have consumer businesses, their businesses are very strong," he told host Stuart Varney. 

He then argued that because of "rhetoric from the media" and "saber-rattling from some of the large venture capital firms that winter is coming," the companies are getting defensive and are preparing.

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"So that’s leading to preemptive layoffs," Smith said. 

"They are eliminating projects that they are working on. They’re shedding real estate and getting smaller footprints --- so all that is putting pressure on the economy as they get defensive and get into a defensive position."