Consumer spending, inflation cool in December, as sentiment perks up
U.S. GDP rose 2.9% in the fourth quarter of 2022.
U.S. GDP rose 2.9% in the fourth quarter of 2022.
While there are plenty of gloomy economic forecasts floating around, data paints a mixed picture of the U.S. consumer economy as 2023 gets underway.
Inflation is cooling off, but consumer spending is pulling back, a key report from December shows. Meanwhile, consumer sentiment is improving and the economy is showing signs of growth, but plenty of uncertainty remains.
Here’s the data that was released this week:
Consumer spendingfell 0.2% in December, as shoppers spent less on goods, even as they spent more on services, according to the Personal Consumption Expenditures data report issued Friday.
There are signs that the fall may be driven by inflation. A primary of the goods decrease was gasoline, where prices are coming down. Housing, where inflation is going up, was a driver of the increase in services. Yet the decreases in goods were “widespread,” the U.S. Bureau of Economic Indicators noted.
The PCE’s measure of Inflation increased 0.1% from November, marking the second straight month of slower growth after months of higher prices.
The annual inflation increase also slowed to 5%, down from 5.5% the month prior. PCE inflation, which is the pricing measure preferred by the Fed, is continuing to fall in a similar fashion to the more widely-used Consumer Price Index.
Core inflation, which is the inflation measure that leaves out the more volatile food and energy categories, slowed to 4.4%. That was its lowest level since October 2021.
The report offers a textbook look at how the Federal Reserve’s monthslong campaign to hike interest rates are playing out across the economy. The Fed’s main goal is to cool inflation, and prices are coming down. However, the Fed’s monetary policy tools also have the side effect of cooling demand, which leads to a decrease in consumer spending that is also evident.
The report comes days before the Fed will consider a further interest rate hike next week. Officials have signaled that they will continue the increases to fight inflation, but will consider whether to keep scaling back the size of the rate hike. The 0.5% increase in December was smaller than the 0.75% increases delivered at the four prior meetings.
The pullback in consumer spending was also evident among consumer goods companies that issued earnings reports this week.
3M, which makes Post-it notes, said organic sales fell 5.7% for the year.
“The slower-than-expected growth was due to rapid declines in consumer-facing markets, such as consumer electronics and retail, a dynamic that accelerated in December, as consumers sharply cut discretionary spending and retailers adjusted inventory levels,” said CEO Mike Roman.
U.S. GDP: 2019-2022 (US Bureau of Economic Analysis)
The Fed’s moves bring with them the risk that the economy could tip into recession if demand cools off too much. Yet the overall economic data for the fourth quarter signaled to the positive.
Gross domestic product, which is a broad-based measure of economic activity, rose 2.9% in Q4 from the prior quarter, the BEA reported on Thursday.
Consumer spending, which is about two-thirds of GDP, was a key driver of the increase, as it rose 2.1%. Notably, spending on goods was up by 1.1% in the holiday quarter after three straight quarters of decline.
“We continue to see consumption as having tailwinds from tight labor markets, high levels of excess saving, and falling gasoline prices, among other factors,” Bank of America Economist Michael Gapen wrote in a research note.
The report also points at another trend of 2022: People returned to spending on experiences and services as pandemic restrictions were lifted. However, that may be cycling out. The increase in goods spending and a corresponding slowdown in services “suggests the rotation of household spending back toward services may be nearing its end, though we hesitate to say it is completed,” Gapen wrote.
It marked a second straight quarter of economic growth to end 2022, showing that the economy turned around from two straight quarters of decline to begin the year.
Inflation also cooled for the quarter. The PCE Price Index rose 3.2% for the quarter, compared with an increase of 4.3% in the third quarter.
U.S. consumer sentiment, 2013-2023
U.S. consumer sentiment rose 9% in January from the prior month, continuing a climb of the doldrums that reached historic lows at inflation’s height over the summer, according to the University of Michigan.
In particular, consumers’ view of current economic conditions rose 15%. With strong incomes in a tight job market and falling prices as inflation cools, people feel better about their finances and would be more likely to make bigger purchases, UM wrote.
People are also looking for inflation to continue to cool. The year-ahead inflation expectation of 3.9% was the lowest level since April 2021. Yet declines should be viewed as “tentative,” since uncertainty remains, UM said.
While sentiment is improving, it is still at historic lows. Economic volatility remains, so the good signals shouldn’t necessarily be interpreted as outright optimism.
“There are considerable downside risks to sentiment, with two-thirds of consumers expecting an economic downturn during the next year,” wrote University of Michigan Survey of Consumers Director Joanne Hsu. “Notably, the debt ceiling debate looms ahead and could reverse the gains seen over the last several months.”
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, Macy’s CEO Jeff 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.