Inflation: 'We really need to brace ourselves for what's coming,' former Chrysler CEO says

Bob Nardelli, XLR-8 LLC Founder and Former Chairman-CEO of Home Depot and Chrysler, examines the outlook on inflation, recession risks amid Fed interest rate hikes, homebuilder sentiments in the housing market, and labor shortages.

Video transcript

- From the World Bank to FedEx, warnings of a looming global recession are spreading. Housing, home goods, retail, tech. No sector seems safe. So what is around the corner? We're thrilled to welcome back Bob Nardelli, former Chrysler chairman and CEO, former Home Depot chairman and CEO, and current founder and CEO of XLR-8. Good to see you, sir. And welcome back to the show. All this gloom and doom, are you buying it?

BOB NARDELLI: Well, Dave, thank you again for having me on. But the answer to that is, yes. And I've been projecting this decline towards a recession for some time now. So Fred Smith is a long-time friend. I have tremendous respect for him. I think he finally is looking at things realistically. You mentioned the other day that between FedEx and UPS, they basically move about 12% of the US GDP.

You look at some of the biggest banks like Goldman now, again, looking at the reality of where we are in this downward spiral. You're talking about housing, which is a key indicator from my days of Home Depot. While lumber prices are coming down, we see new housing forecasts are down. Permits are down. The value of existing homes and turnover is down. Electricity is up 15.8% month over month. We see natural gas is going to be a big problem. We're down year over year about 233 billion CPUs on the thing, BTUs. We've got about 4 billion BTUs available for storage. But, again, that's under year over year storage volume.

So, yeah, I think we're seeing a big problem, Dave, coming at us. We had one bank CEO talk about we're heading for a hurricane. So, yeah, it's on a downward spiral. You look at inflation. When you really look at inflation, I think it's deceptively correct, the number reported, because it doesn't include shrinkflation. When you walk down the retail aisles and you see the prices saying, but a third of the volume is gone. So I think we really need to brace ourselves for what's coming.

- Well, Bob, how much worse do you think it could potentially get?

BOB NARDELLI: Well, my projection would be that the Fed's going to raise a minimum of 75 points on Wednesday. There's talk that it could go to a full point. I think we'll see some additional increases in the balance of the year. He may hold off in November because of the election and not want to cast a problem there. But I think we'll continue to see the Fed rate go up. Therefore, we'll see mortgage rates go up. Therefore, we're going to see continual impact on the consumer out there.

I know from all the businesses, both private and public, that I'm involved in, we're seeing cancellations. That's resulting in inventory build because the material was on order and, really, the cancellations are being stuck, the inventory is being stuck with these companies. In some cases, $50 million-plus. $50 to $100 million in some of the smaller ones. And they're having to figure out a way to eat that, or at least move it out. I think we're in for some choppy water for the balance of the year and beyond.

- So, Bob, comparing where we are right now to what we saw in 2008, how do you think that's going to stack up?

BOB NARDELLI: Well, I was at Chrysler at 2008. So my timing was not so good there. But, again, it was singularly focused on the financial institution meltdown. It didn't have the breadth and depth of what we're looking at now. A CEO today has the highest degree of complexity that I've ever seen for someone running a publicly-traded company. If you look at it from inflation to supply chain, you just go down the list. And while the president said COVID was over, I think we have a new epidemic. It's called the quiet resignation. And labor continues to be a problem for us. So the breadth and depth of what we're facing today is a multiple of what we faced in '07, '08, and '09.

- And, Bob, I want to ask you about some of the labor challenges. Obviously, just narrowly avoided a freight rail strike. You have a strong union movement coming along. As someone who is getting that C-suite perspective, how would you navigate these sorts of challenges?

BOB NARDELLI: Well, it's interesting you bring that up. I hate to use this example. But it's like a theater. And it's a full house and somebody yells fire and everybody's rushing for the door. So everybody's looking for that rate increase, that wage increase. They want to get it before this thing really turns down and then they lose the justification. So whether it was in the rail, whether it was in airlines. I mean, we're seeing it in a number of our factories recently negotiated a new contract for 8% to 10% increase this year and then multiple increases in years two and three.

So labor is in high demand. And they've got leverage now. And they're taking full advantage of it. It's not uncommon for some of the residential services-- I know I'm seeing it myself-- where the rate was $100 an hour and now it's $150 with no justification other than fuel prices, cost of living, et cetera. So, again, we have an ever increasing level of complexity that we're having to deal with both as a consumer and as a business leader.

- You talked about the housing slowdown earlier. Seana pointed out an interesting fact, that we're seeing homebuilders actually positive. Wall Street is bullish on these homebuilders. Maybe it's because they can charge an arm and a leg for rents. So what is your prediction for what this slowdown means for builders and for Home Depot and Lowe's and the like?

BOB NARDELLI: Yeah. Well, again, I hear the same thing you hear, David, that rental rates are up significantly because, again, new homeowners, first-time homeowners, are having concerns over the mortgage rate. And we did see a tremendous spike in a lot of the building supply materials. And again, old habits are hard to die. But if you look at lumber rates and some of the other businesses that I've been in, we started to see a little softening on lumber rates.

So that should be helpful. But it's not enough to offset, as you mentioned earlier in the program, the increase that we're seeing, the modest decrease of what was I think it was about 1/10 of 1% in the value of existing homes. But I think we're going to see some complexity. Now, the great thing about Home Depot from my experience there, and even Lowe's, you go from two phases. One is an investment in a home to improve the value of it. And now we'll move into the maintenance of the home to maintain it. So again, there's a nice offset there, a nice balance between investment and maintenance that goes on. I think you'll see Home Depot and Lowe's continue to do quite well.

- Thank you so much, Bob Nardelli, there for joining us this afternoon. A great conversation. We appreciate it.

BOB NARDELLI: Thank you very much.