Retailers point to cracks in the picture of US consumer resilience

Unexpectedly strong spending data this week bolstered hopes that Americans would keep shopping in the face of economic pressures, but earnings from some of the country’s largest retailers suggest that cracks are starting to show in the picture of consumer resilience.

The Census Bureau said on Wednesday that retail sales fell 0.1 per cent last month, less than the 0.3 per cent decline economists expected. 

That extended a trend this year in which Americans have looked past sky-high inflation, soaring interest rates and regional bank failures, continuing to open their wallets not only for everyday purchases but also travel, entertainment and big-ticket items.

Now, though, with the labour market cooling more notably, wage growth moderating, and savings stockpiled since the pandemic beginning to run out, the question dogging officials is how long can the US consumer retain this resilience?

Announcing their latest quarterly earnings following a big summer spending season, retailers this week noted that spending on discretionary items such as furniture, apparel and appliances remained weak, as shoppers prioritise groceries and health and wellness products.

“Overall, the theme is that the consumer has been resilient but we are starting to see a little bit of stretching,” said Corey Tarlowe, an analyst at Jefferies. “Trends are starting to become a little bit more concerning.”

Home Depot pointed to customers delaying big home improvement projects and focusing on smaller ones. William Bastek, the retailer’s executive vice-president of merchandising, told analysts that transactions over $1,000 were down 5.2 per cent year on year as fewer consumers invested in new floors, countertops and cabinets.

Walmart, the largest US retailer, cautioned that top-line growth would moderate in its holiday quarter, after it saw sales softening in the second half of October, including slower than expected growth in sales of Halloween-themed items.

The Arkansas-based group’s general merchandise sales declined modestly in the third quarter, even as demand strengthened in grocery and health and wellness categories.

John David Rainey, Walmart’s chief financial officer, pointed to the role discounts are playing, telling the Financial Times that sales during periods between promotions had been slower. “The consumer is being discerning; they’re making sure they’re waiting until these promotional events to go out and buy these big-ticket items,” he said.

Morgan Stanley economist Sarah Wolfe said the discrepancy between the official spending data and the message from retailers stemmed from the disproportionate effect the richest 20 per cent of the population have on overall spending.

Those high earners had increased their share of consumer spending from 39 per cent to 45 per cent over the past two years, when they built up “a tremendous amount of excess savings”, Wolfe noted.

Retailers reliant on a broader range of income groups pointed to a weakening of discretionary spending, with Target, Macy’s and Home Depot all reporting comparable sales declines in their latest quarter.

“Consumers are still spending, but pressures like higher interest rates, the resumption of student loan repayments, increased credit card debt and reduced savings rates have left them with less discretionary income, forcing them to make trade-offs in their family budgets,” said Target chief executive Brian Cornell. 

Retailers known for offering value pricing or other bargains have meanwhile benefited from the pressure inflation has put on consumers with tighter budgets. Walmart, and discount retailers TJX and Ross Stores, all reported an uptick in customer traffic and comparable sales growth. 

US consumers have started to focus spending around discounted events such as Walmart’s deal days and Amazon Prime days, Tarlowe at Jefferies said, and have become less likely to visit a store to purchase full-priced items.

“The market for perceived discounts remains strong,” said Greg Portell, a lead partner at the consultancy Kearney. “If you have middle-class consumers moving into [the discount channel], that’s fresh money that changes the competitive dynamic.”

Analysts at Bank of America identified some generational differences behind the headline spending figures, finding that wealthy “boomers” and “traditionalists” have increased their consumption, while spending has fallen and credit card delinquency has risen among younger generations, who have seen bigger obstacles from higher rates.

“Bank of America card data showed that boomers are accelerating their spending while all the other groups are spending less in dollar terms,” said Ohsung Kwon, equity strategist at BofA, adding that the boom in the services sectors, such as travel and hospitality, was beginning to normalise.

“You’re seeing a bifurcation of consumers,” Portell at Kearney added. “Consumers at the higher end of the income spectrum continue to be very strong. On the other end . . . [you have] consumers that are much more sensitive to price, and are looking for the right price-value combination.”

Luxury retailers, meanwhile, have reported a slowdown as aspirational customers cut back on spending. Though US luxury houses Tapestry and Ralph Lauren reported revenue growth in the most recent quarter, both cited softer demand in North America.

“Higher-income households will not be falling off a cliff, but they will start to become more cautious,” said Morgan Stanley’s Wolfe.

Spending until this year has been driven largely by pent up demand but now that demand has been met, even higher earners will pull back their spending, she predicted: “I can’t see any upside for consumers next year.”