The US consumer is largely holding up, but retail executives are becoming more cautious about the quarters ahead given a shift toward spending on services and a dip in purchases of nonessential products.
(Bloomberg) — The US consumer is largely holding up, but retail executives are becoming more cautious about the quarters ahead given a shift toward spending on services and a dip in purchases of nonessential products.
Walmart Inc. and Home Depot Inc. both gave cautious annual guidance Tuesday and warned that demand could moderate through 2023. At the same time, though, Walmart’s comparable store sales in the three months through January far exceeded analyst estimates while Home Depot Chief Executive Officer Ted Decker said “we still see a healthy consumer.”
A Wall Street chorus also pointed out that setting low expectations in February makes it easier for companies like Walmart to exceed them later on.
“We see substantial opportunity for WMT to outperform ahead,” said Jefferies analyst Corey Tarlowe, referring to the company by its ticker symbol. Evercore ISI’s Greg Melich said Walmart’s forecast “would be seen as conservative,” while Morgan Stanley’s Simeon Gutman said the outlook “sets an appropriate baseline to over-deliver.”
The near-term risk of the US falling into recession has abated after a wave of data this year pointed to a rebound in consumer spending and a shockingly strong jobs market. But the economy’s resilience – paired with still-elevated inflation – has also prompted concerns that the Federal Reserve will have to stomp on the brakes even harder to tame prices by raising rates higher and holding them there for longer.
“There’s a lot of uncertainty with the macro backdrop,” Walmart Chief Financial Officer John David Rainey said on a call with analysts. “We’ve not been in a position where we’ve seen the Fed tighten this sharply.” Rainey called out delinquencies on car loans and declining savings rates among other factors clouding the view of the back half of the year.
Data out Friday is anticipated to show inflation-adjusted consumer spending rose by 1.1% in January, the strongest reading since March 2021 – a time when the government distributed another round of stimulus payments and vaccines were becoming more widely available.
The January pop is expected to not only reflect strength in motor vehicle sales and other goods but also a pickup in outlays on services like dining out, part of an ongoing shift in consumer spending patterns from goods to services.
Whether consumer spending continues to grow through this year depends in part on services spending continuing to expand, “but it also very much hinges on the degree of a pullback that we get in goods spending,” said Sarah House, senior economist at Wells Fargo & Co, who is anticipating a 1.5% jump in real spending in January.
From the second quarter of 2021 through the fourth quarter of 2022, transactions “steadily normalized back toward 2019 levels” and consumers moved from goods to services, Home Depot CFO Richard McPhail said on the Tuesday earnings call.
Walmart’s strong growth in US comparable sales last quarter was supported by increases in grocery and health and wellness categories, while general merchandise – which includes toys, apparel and home goods – declined. That suggests that consumers are reallocating spending on nonessential products toward experiences and entertainment. At the same time, Walmart’s strength in grocery and personal care may also reflect shoppers up and down the income scale seeking refuge in the company’s reputation for low prices.
The unemployment rate is at its lowest level in 53 years, and wages continue to grow at a steady clip. Many still have excess savings built up through the pandemic to rely on as well. Inflation has also been coming down rapidly – even if it remains elevated – giving consumers more purchasing power.
But “it’s going to be harder to see this sort of positive trend in real income that we’ve seen over the last six months,” House said, noting that there are signs of both less hiring ahead and a slower improvement in inflation.
Like Home Depot, Walmart’s sales growth has been supported in part by inflation. That may cool off this year, helping to explain why the company is forecasting no more than a 2.5% gain in US comparable sales. Already, the company is seeing some signs of disinflation even as CEO Doug McMillon pointed to stubborn price pressure in “dry grocery and consumables.”
But some economists, like Stephen Stanley, chief US economist at Santander US Capital Markets LLC, forecast the consumer can hold up this year despite the headwinds, something that would prove to be good news for big retailers like Walmart.
“I think the consumer spending numbers are going to look far from recessionary,” Stanley said. They may not be robust, “but they should be decent enough to keep the economy in positive territory.”
–With assistance from Brendan Case.
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