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Welcome to a new week. Holiday shopping is settling in for the long and steady push between the Thanksgiving weekend bonanza and an expected big finish. Given the importance of the season and how closely brands and retailers will be monitoring consumer activity as a result, let’s start this week with quick takeaways from the economy issued last week:
Inflation is showing signs of cooling. As in this month’s Consumer Price Index, Inflation showed signs of easing in the Fed-preferred PCE price index, which was released Thursday. The 6% year-over-year price increase in October was the lowest since December 2021, as durable goods in particular came down, according to the US Bureau of Economic Indicators. Core inflation, which excludes food and energy, has been more stable in recent months, running around the 5% level seen this month.
Change in PCE Price Index, ex. food and energy (Source: US BEA)
Consumers saw an uptick in money to spend. Personal income increased 0.7% for the month, while disposable income saw the same increase, according to the PCE. However, the overall savings rate is continuing to decelerate coming out of pandemic lockdowns, as personal savings as a percentage of disposable personal income was 2.8%. This measure reached 17% in 2020.
People are still buying. Consumer spending increased 0.8% month-over-month, offering an indication that people continue to open their wallets amid price increases and talk of a worse economy ahead. Given the falling savings rate, however, they could be financing more holiday gifts with credit cards and installment options through Buy Now Pay Later, the latter of which saw a surge in use over Black Friday weekend.
But they aren't feeling great about things. According to the Conference Board, consumer confidence fell for the second straight month in November. “Inflation expectations increased to their highest level since July, with both gas and food prices as the main culprits. Intentions to purchase homes, automobiles, and big-ticket appliances all cooled. The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023," said Lynn Franco, senior director of economic indicators at The Conference Board, in a statement.
Personal Consumption Expenditures, 2018-present. (Source: US BEA)
The job market continues to roar. The monthly jobs report issued Friday by the US Bureau of Labor Statistics delivered its latest in a string of strong metrics. Employers created 263,000 new jobs in November, and the unemployment rate remained unchanged at the historically-low 3.7%. However, the labor force participation rate continues to hold around 62%, which remains well below pre-COVID levels. Economists expected this number to rise with reopening, but that hasn’t happened. Fed Chair Jerome Powell said Wednesday that a significant driver of this was excess retirements, as well as falling immigration and deaths from COVID-19.
Total nonfarm payrolls, 2018-present. (Courtesy photo)
What does it say about the consumer? Mostly good news, for a change. There are plenty of worries to go around about the economy at a time of high inflation rates and Fed interest rate hikes that are supposed to cool demand. But it continues to be an economy where people say one thing, and do another. They may not be feeling good about things, but this week’s data showed people are still buying, and the robust labor market is providing stability that allows them to continue to do so. As feared by many, this picture is expected to get cloudier heading into next year. But consumer spending is expected to remain intact, wrote National Retail Federation Chief Economist Jack Kleinhenz.
“Employment will still be growing, and consumer spending should remain positive,” Kleinhenz wrote. “There will be economic hardships, and some may feel like they’re in a recession. But for those who have jobs and feel secure about their employment, careful spending will continue.”
The latest data to be released looks backward at months already gone by, so it’s tough to extrapolate exactly what it means for the holidays. But there are some signals there that things were looking up at just the right time, and growth in spending and traffic over Black Friday-Cyber Monday offered more evidence that holiday shopping remains in high demand.
Retail executives were mostly reticent to provide too many details about results for the holiday season kickoff on earnings calls last week, but Victoria’s Secret CEO Martin Waters offered the following take, according to a Seeking Alpha transcript:
The start of November up until the Black Friday weekend seemed to be very much a continuation of the trend from the third quarter, a reflection of a very cautious customer in a challenging economic environment. However, since Black Friday, our customers have responded positively, and we've been very pleased with an uptick in the trend and our level of performance. Our stores have been some of the busiest in the mall, and our promotional levels were appropriately aggressive with increased traffic and conversion both in stores and online.
Consumers have mostly continued to spend despite all the headwinds throughout the year. The holidays may not be any different. The scale of the holiday season makes it a great place to see how economic trends are playing out on the ground. So the results for the season may prove to be one of the most important indicators of them all.
What does it mean for the Fed? That’s a trickier question. While continued demand is ostensibly good for the economy, The Fed actually wants to see demand shrink, and thinks it will be necessary to bring inflation down. But the data isn’t showing that happening, especially in the labor market. At the same time, the central bank has been publicly raising expectations that it is considering pulling back the size of the next interest rate hike from 0.75% to 0.5% at its meeting next week. Data showing continued spending and a tight labor market could make the messaging behind such a move a more difficult needle to thread. However, the ease-up of inflation – which is the whole point of the rate hikes – could indicate that its moves are working. But so far, that cooling has only been observed for one month.
“Down months in the data have often been followed by renewed increases. It will take substantially more evidence to give comfort that inflation is actually declining,” Fed Chair Jerome Powell said in a speech last week at the Brooking Institution.
Powell said rates are going to go up again, but he was more equivocal on the question of how much they will rise this month saying only that, “The time for moderating the pace of rate increases may come as soon as the December meeting.” In the long-term, Powell said the more pressing question is how high interest rates need to go, and how long they need to stay here. In other words, this will take a while.
Now, here’s a look at the data set to be released this week:
Consumer Credit: The Federal Reserve issues its monthly report on credit card balances, auto loans and other forms of outstanding credit that must be paid down. (Wednesday, Dec. 7, 3 p.m.)
Producer Price Index: The US Commerce Department releases data on the price of goods before they reach retail. Also known as the wholesale price index, this serves as a forward-looking measure of inflation. (Friday, Dec. 9, 8:30 a.m.)
Consumer Sentiment: The University of Michigan Survey of Consumers offers a preliminary monthly look at consumer expectations and outlooks for buying and inflation, among other areas. (Dec. 9, 10 a.m.)
Tues., Dec. 6: Stitch Fix, Signet Jewelers
Wed., Dec 7: Campbell Soup Co., Rent the Runway, Vera Bradley, Lovesac, United Natural Foods
Thurs., Dec. 8: Chewy, Costco, Lululemon, RH
Trending in Economy
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.