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The state of the U.S. consumer is…difficult to discern.
Retailers and economic data alike are painting a mixed picture of consumer demand to start 2023. Optimists and pessimists can each find reason to back up their case. Inflation and interest rates are converging to make consumers think twice about buying, but the job market remains strong, providing reliable funds to make purchases.
The latest data point to arrive this week was mostly on the gloomy side. The Consumer Confidence Index showed a decline for the second straight month in February, falling from a downwardly revised 106 in January to 102.9.
“While 12-month inflation expectations improved—falling to 6.3 percent from 6.7 percent last month—consumers may be showing early signs of pulling back spending in the face of high prices and rising interest rates,” said Ataman Ozyildirim, senior director of economics at The Conference Board. “Fewer consumers are planning to purchase homes or autos and they also appear to be scaling back plans to buy major appliances. Vacation intentions also declined in February.”
This pullback on bigger purchases is extending to all discretionary spending. As they make plans to reach consumers who may be thinking twice, retailers are parsing through “conflicting data,” as Macy’s CEO Jeff Gennette put it.
“On the surface, the consumer is in better shape than 2019,” Gennette told analysts this week. “Jobs and wages are strong, and savings levels are elevated relative to historic levels. But prices for services and goods are higher. Inflation has surpassed wage growth, and revolving credit is rising....but we believe discretionary spend will be under pressure across income tiers and expect the allocation of disposable income to continue shifting toward services and essential goods.”
Certain categories that were winners in the pandemic could see a sharp decline. Best Buy is expecting comparable sales to decline 3-6%, with the toughest period coming in the first quarter. The pullback in discretionary spend comes after a pandemic lockdown period in which many people updated their technology, as they had extra money to spend on goods from a combination of stimulus and curtailed social activities.
CEO Corie Barry laid out the data this way: “Historically strong job markets, spending continues specifically on services, even moreso than goods. Inflation might be slowing, but it still is [un]sustainably high, and it's high in some of the basics like food, fuel, and lodging.”
It all adds up to a consumer that is making tradeoffs.
“You've got an uneven and unsettled consumer who, from a confidence perspective, looking forward, is still not confident about the future,” Barry said.
Consumers may be pulling back, but they are not stopping spending altogether. There is still success to be had, but it requires being mindful of the environment and the mood. After besting its own outlook to deliver 3% net sales growth in the holiday quarter, Abercrombie & Fitch remains “cautiously optimistic,” said CFO Scott Lipesky, primarily because the job market remains strong. Yet plenty of uncertainty remains.
“On the consumer demand side, we're always looking at employment levels as well as wage levels,” Lipesky said. “Both of those things remain very strong, and that's very helpful for our customer on the discretionary side. When you think about some of this cautious optimism, we don't know what the Fed is going to do here in the U.S. and how that's going to kind of ripple through the economy as we go throughout the rest of the year. And as you watch TV or read the news every day, depending on how the winds blow, it's good or bad. So we'll see.”
Opportunities: Loyalty and occasions
Not every macro trend is a negative. After the return to in-person activities in 2022, a full year of events and trips in 2023 will likely lead to more spending.
“Even as consumers reprioritize spend, there is opportunity,” Macy’s Gennette said. “With the continued expansion of a hybrid work model, there are more in-person meetings and flexibility for personal travel. We believe the desire to be with loved ones, go on vacation, and attend events has not diminished, and expect gift-giving and occasion-based demand to continue.”
Retailers are also finding success in returning to their best customers. American Eagle Outfitters grew its loyalty file in 2022, putting a focus on bringing back the consumers who had already made the choice to spend with the apparel retailers’ brands.
“They come back the most to our brands, and we want more of those customers,” said American Eagle and aerie CEO Jen Foyle. “So that's why we're just incredibly focused on our loyalty program, and you'll see more. Now, we have some really great findings on how we can even build that program stronger and better.”
Trending in Economy
Labor disputes on the West Coast could cause further disruption heading into peak season.
When the first half of 2023 is complete, imports are expected to dip 22% below last year.
That’s according to new data from the Global Port Tracker, which is compiled monthly by the National Retail Federation and Hackett Associates.
The decline has been building over the entire year, as imports dipped in the winter. With the spring, volume started to rebound. In April, the major ports handled 1.78 million Twenty-Foot Equivalent Units. That was an increase of 9.6% from March. Still it was a decline of 21.3% year over year – reflecting the record cargo hauled in over the spike in consumer demand of 2021 and the inventory glut 2022.
In 2023, consumer spending is remaining resilient with in a strong job market, despite the collision of inflation and interest rates. The economy remains different from pre-pandemic days, but shipping volumes are beginning to once again resemble the time before COVID-19.
“Economists and shipping lines increasingly wonder why the decline in container import demand is so much at odds with continuous growth in consumer demand,” said Hackett Associates Founder Ben Hackett, in a statement. “Import container shipments have returned the pre-pandemic levels seen in 2019 and appear likely to stay there for a while.”
Retailers and logistics professionals alike are looking to the second half of the year for a potential upswing. Peak shipping season occurs in the summer, which is in preparation for peak shopping season over the holidays.
Yet disruption could occur on the West Coast if labor issues can’t be settled. This week, ports from Los Angeles to Seattle reported closures and slowdowns as ongoing union disputes boil over, CNBC reported. NRF called on the Biden administration to intervene.
“Cargo volume is lower than last year but retailers are entering the busiest shipping season of the year bringing in holiday merchandise. The last thing retailers and other shippers need is ongoing disruption at the ports,” aid NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “If labor and management can’t reach agreement and operate smoothly and efficiently, retailers will have no choice but to continue to take their cargo to East Coast and Gulf Coast gateways. We continue to urge the administration to step in and help the parties reach an agreement and end the disruptions so operations can return to normal. We’ve had enough unavoidable supply chain issues the past two years. This is not the time for one that can be avoided.”