Even as higher prices make them blanch, Americans will probably keep on spending. Unfortunately for many retailers, however, less of it could be on the wares that grace their aisles.
Several rough earnings reports from major retailers have made investors question the health of the U.S. consumer and raised worries that the next recession could be right around the corner. Walmart, for example, said last week that some customers have traded down to half-gallon milk from full gallons. It also said shoppers were choosing private label deli, lunch meat, bacon and dairy brands. Its results, as well as those of rival Target, spooked investors enough that their shares had their biggest plunges since the 1987 stock-market crash.
Other investor calls gave a picture of just who is economizing: Ross Stores ’ Chief Operating Officer Michael Hartshorn said last week that “with higher fuel and food prices, discretionary spending for the lower-end customer is being squeezed.” But with wages rising and household finances in their best condition in years, most people don’t just have the means to weather inflation. They can continue expanding their expenditures, driving continued growth in consumer spending and, ultimately, the economy.
Yes, rising prices are cutting into paychecks, but pay is rising too—particularly for poorer people. The Federal Reserve Bank of Atlanta estimates that, among workers in the lowest quartile by income, the 12-month moving average of median annual wage growth was 6.4% in April versus a year earlier. The 12-month moving average for annual inflation was only slightly higher at 6.5%. Furthermore, because overall employment is much higher than a year ago, overall pay in the U.S. has outpaced price increases.
Meanwhile, the substantial increase in cash on hand that many Americans experienced in the wake of the pandemic has largely remained intact. Remarkably, across all income strata, Federal Reserve data through the fourth quarter showed no sign of savings getting drawn down. Households in the middle 20%, for example, held 40% more in cash and cash equivalents at the end of last year than at the end of 2019 and 15% more than at the end of 2020.
So why the trading down in the grocery aisle and elsewhere? While some are legitimately short of cash, when prices go up noticeably, as they have for food and fuel, people tend to economize most within the category they are experiencing inflation rather than necessarily cutting back overall.
While consumer spending should keep growing in the months ahead, sales at many stores could languish as the combination of waning Covid-19 concerns and high goods inflation drive a continued shift toward services.
People have been devoting more of their spending toward categories such as travel, eating out and away-from-home entertainment. Restaurant sales have risen far more over the past year than store sales, for example, while box office receipts thus far in May month are running about five times as high as a year ago. Mobility data from Google show that people are spending the least amount of time cooped up at home since the pandemic started.
Even when it comes to stuff, Target said last week that shoppers are pivoting away from categories such as electronics and into travel and going-out related categories. Sales of luggage grew more than 50% in the quarter ended April 30 compared with a year earlier, for example. And while apparel sales slowed broadly, the company saw better sales in “trend-based apparel” (such as clothes to wear back to the office and evenings out). T.J. Maxx owner TJX Cos. said U.S. comparable-store sales in home-related categories declined 7% last quarter compared with a year earlier, while comparable-store sales in apparel grew 6%.
Inflation could further accelerate the shift back toward more spending on services. Prices for consumer goods have risen far more than services prices, making the latter more attractive relative to goods than before.
Compounding the problem for many retailers, higher prices in some of the items they sell appear to be cutting into their sales of other items. Big-box retailers such as Walmart and Target are seeing consumers give priority to groceries and household essentials over discretionary items.
The pandemic period was very good for a lot of retailers, with demand strong despite rising prices, and profit margins expanding. Now comes the hangover.
Write to Justin Lahart at [email protected] and Jinjoo Lee at [email protected]
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