A review of the health of American consumers

To paraphrase Mark Twain, rumors of the death of an American consumer are greatly exaggerated. As discussed last week, during the week of May 16, fears about American consumers increased when Walmart

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(VMT) and Target

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(TGT) reported disappointing earnings. Retailers had a worse performance that week, with many falling by about 20%.

Last week’s earnings reports from multiple retailers brought relief and strong growth to the group. Retailers rose 8.8% on Sunday, while the S&P 500 gained 6.6%. This performance erased sharp losses for retailers from the previous week, although the group continued to perform worse on the S&P 500 throughout the two-week period.

A little history of the impact of the pandemic on consumer spending will be helpful before delving into the trends and topics that are now emerging. While all spending fell during the first months of the pandemic, spending on services fell more than spending on goods. Given the desire for social distancing, expenditure on services should be expected to decline. With the majority of the population spending more time at home and strengthened by government support, spending on goods has recovered quickly and peaked before the pandemic by mid-2020! As covid infections continue to lead people to avoid personal contact, spending on services did not exceed pre-covid levels until mid-2021.

Earnings from retailers in the first quarter reflect macroeconomic data, which show that spending on services is now growing faster than on goods. Consumption has also shifted to consumables such as food, beverages and fuel in relation to general merchandise within consumption of goods. Both Walmart and Target reported higher revenue (sales) compared to the same quarter last year, so consumers continue to spend. It seems that households are switching to more services that they spend, especially on travel and free time, at the expense of buying things such as furniture for the house. For example, Southwest Airlines

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(LUV) and JetBlue Airways

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(JBLU) recently announced that revenues in the second quarter are on trend higher than expected.

Costs due to inflation also affect their earnings, but stores have generally managed to pass on part of the increase to consumers. Supply chain costs were a brake on earnings for this quarter. Companies with a high percentage of imports are affected by the huge increase in overseas transportation costs. Walmart and Target have a large share of imported items, which also helps explain the loss of earnings. Home Depot

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(HD) has many imported products, but owns several container ships, so it has managed to avoid some of the pressures on ocean transportation costs. General Dollar

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(DG) and Dollar Tree

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(DLTR) showed resilience last week in the category of discount stores, focusing on sales of basic consumables to lower-income households and less exposure to higher delivery costs of imported products. Changing consumption patterns combined with supply chain challenges have stuck some retailers with excess inventory for the first time since the pandemic recovery.

There is evidence that lower class consumers feel harmed by rising food and fuel prices. Walmart noted that some consumers are descending on the offer of private labels, and discounters have indicated a higher demand for basic consumer goods compared to general merchandise.

Despite inflationary challenges for the consumer, households have accumulated significant savings that can be used to supplement income to support consumption. However, the current decline in consumer confidence poses a risk to consumer spending.

In short, the company’s macroeconomic data and earnings indicate a change in consumer spending, not the end of consumer power in the United States. According to JPMorgan (JPM), Chase credit card spending increased every month from February to May. As the chances of a recession in 2023 increase as the Federal Reserve continues to raise rates to fight inflation, the strength of spending makes it less likely that an economic downturn will happen in the short term. The labor market remains crucial for this perspective. History would suggest that spending should continue as long as low unemployment supports higher wages, despite falling consumer sentiment. The May Employment Report will be closely monitored for signs of a labor market crack, and weekly unemployment claims will be vital as an indicator of higher frequency.