To paraphrase Mark Twain, the rumors of the death of the U.S. consumer are greatly exaggerated. As discussed last week, during the week of May 16, fears about the U.S. consumer spiked when Walmart
Last week’s earnings reports from more retailers brought relief and a robust rally from the group. The retailers rose 8.8% for the week, while the S&P 500 gained 6.6%. This performance erased the sharp losses for the retailers from the previous week, though the group still underperformed the S&P 500 over the whole two-week period.
A little history of the pandemic’s impact on consumer spending will be helpful before delving into the trends and themes emerging now. While all spending plunged during the early months of the pandemic, services spending fell more sharply than spending on goods. Given the desire for social distancing, a decline in outlays on services should be expected. With most of the population spending more time at home and fortified by government support, spending on goods rebounded quickly and rocketed past the pre-pandemic peak by mid-2020! With covid infections continuing to cause people to eschew personal contact, spending on services didn’t surpass pre-covid levels until mid-2021.
Earnings from retailers in the first quarter echo the macroeconomic data, which shows spending on services is now growing faster than on goods. The spending has also moved to consumables like food, beverages, and fuel versus general merchandise within goods spending. Both Walmart and Target reported higher revenues (sales) versus the same quarter last year, so consumers are still spending. It looks like households are shifting to more services spending, particularly on travel and leisure, at the expense of purchases for the home for things like furniture. For example, Southwest Airlines
Costs due to inflation are also taking their toll on their earnings but the stores have generally been able to pass some of the increases through to consumers. Supply chain costs were a drag on earnings for the quarter. Companies with a large percentage of imports were hit with massive increases in ocean freight costs. Walmart and Target have a large portion of imported items, which also helps explain the earnings misses. The Home Depot
There is evidence that the lower-end consumer is feeling the pinch from the increase in food and fuel prices. Walmart noted some consumers were trading down to private-label offerings, and the discounters flagged more demand for core consumable items versus general merchandise.
Despite the inflationary challenges to the consumer, households have accumulated significant savings that can be used to supplement income to support consumption. Currently, depressed consumer confidence is a risk to consumer spending, though.
In summary, macroeconomic data and company earnings point to a shift in consumer spending themes rather than the end of the strength of the U.S. consumer. According to JPMorgan (JPM), Chase credit card spending increased every month from February to May. While the odds of a recession in 2023 have been rising as the Federal Reserve continues to raise rates to fight inflation, strength in consumption makes an economic downturn less likely to occur in the short term. The labor market remains crucial to this outlook. History would suggest that spending should continue as long as the low unemployment rate supports higher wages, despite the dip in consumer sentiment. The May employment report will be closely watched for signs of a crack in the labor market, and weekly jobless claims will be vital as a higher-frequency indicator.