A Checkup On The Health Of The U.S. Consumer

In Mark Twain’s paraphrase, rumors of the death of the U.S. consumer are greatly exaggerated. As mentioned last week, in the week of May 16, fears about U.S. consumers erupted when Walmart

WMT
(WMT) and Target

TGT
(TGT) reported disappointing earnings. Sellers did poorly that week, and some fell by nearly 20%.

Last week’s earnings reports from several retailers brought relief and a strong rally from the group. Retailers rose 8.8% for the week, while the S&P 500 gained 6.6%. This performance erases the sharp loss for retailers from last week, even though the group still hasn’t made the S&P 500 in the entire two -week period.

A little history of the impact of the pandemic on consumer spending can help before examining the trends and themes that have emerged today. While all spending fell in the first months of the pandemic, spending on services fell more rapidly than spending on things. Given the desire for social travel, a reduction in the costs of services should be expected. With the majority of the population spending a lot of time at home and bolstered by government support, spending on products quickly bounced back and surpassed the pre-pandemic peak by mid-2020! With covid infections continuing to cause people to avoid personal contact, spending on services did not exceed pre-covid levels until mid-2021.

Revenues from retailers in the first quarter echoed macroeconomic data, showing spending on services is now faster than things. Spending also shifted to consumers such as food, beverages, and fuel against total sales within spending on items. Walmart and Target reported higher revenue (sales) compared to the same quarter last year, so consumers are still spending. It seems that households are shifting to spending more on services, especially travel and entertainment, to the cost of home purchases for things like furniture. For example, Southwest Airlines

LUV
(LUV) and JetBlue Airways

JBLU
(JBLU) recently announced that second-quarter earnings are trending higher than expected.

Costs due to inflation also take their revenues but stores are often able to pass on some of the increase to consumers. Supply chain costs were a revenue drag for the quarter. Companies with a large percentage of imports have been hit by significant increases in ocean freight costs. Walmart and Target have a large share of imported goods, which also helps explain lost revenue. The Home Depot

HD
(HD) has many imported products but owns many container ships, so it is able to avoid some of the ocean shipping cost pressures. Dollar General

Si DG
(DG) and Dollar Tree

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(DLTR) showed strength in the discount store category last week, focusing on selling core consumables to low-income households and less exposure to higher shipping costs from imported products. Changing spending patterns coupled with supply chain challenges have prevented some retailers from having excess inventories for the first time since the pandemic returned.

There is evidence that the low-income consumer is feeling a pinch due to rising food and fuel prices. Walmart has noticed that some consumers are selling private label offerings, and the discounts are flagging a lot of demand for the basic items available compared to the overall sale.

Despite inflationary challenges to consumers, households have accumulated large savings that can be used to increase income to support consumption. Right now, depressed consumer confidence is a spending risk to consumers, though.

In summary, the company’s macroeconomic data and earnings point to a shift in themes of consumer spending rather than the end of U.S. consumer energy. According to JPMorgan (JPM), Chase’s credit card spending increased each month from February to May. While the chances of a recession in 2023 increase as the Federal Reserve continues to raise rates to fight inflation, the strength of consumption is making an economic downturn less likely to happen in the short term. term. The labor market remains important in this vision. History suggests that spending should continue as low unemployment rates support higher wages, despite declining consumer sentiment. The May employment report will be closely watched for signs of a crack in the labor market, and weekly jobless claims could be important as an indicator of higher frequency.