Americans are still spending. And the country’s biggest retailers are still warning that the party is at risk of fizzling out.
Walmart, Target and Home Depot all topped Wall Street’s profit estimates in their fiscal second quarters, which ended in late July. In that way, at least, the results reinforced the picture of a resilient consumer after US retail sales last month beat expectations.
Strong spending so far this year prompted economists to lift their growth outlook in the latest Bloomberg survey Friday.
But there were signs of weakness for the retailers, too, and executives were at pains to share their worries for the rest of the year.
Consumers have yet to regain their appetites for big-ticket items and non-essentials, and that dragged down sales at Target and Home Depot despite their better-than-expected profits.
In addition, executives warned that new pressures such as rising interest rates and student loan repayments could take the wind out of consumers’ sails during the second half.
“Jobs, wages, and pockets of disinflation are helping our customers,” Walmart chief executive Doug McMillon said on Thursday.
“But rising energy prices, resuming student loan payments, higher borrowing costs and tightening lending standards – and a drawdown in excess savings – mean that household budgets are still under pressure.”
Consumers have increasingly turned to borrowing as savings wind down – right as credit tightens. Wage growth has slowed from the peaks of last year. And the student loan repayments that Mr McMillon is worried about will resume in October, hitting the spending power of millions of households.
That is also a big risk for Target, where signs of a less exuberant consumer were perhaps clearest. The retailer’s sales fell the most in almost seven years as demand slid in such categories as apparel, home goods and hard lines, a category that includes electronics and toys.
“The consumer is still taking a very cautious approach to discretionary spending,” chief operating officer John Mulligan said on the earnings call.
This is not the first time retailers have doubted the consumer. In the first quarter, executives and economists expected a pullback that – so far – has not happened at a large scale.
Sentiment has improved overall since June as a strong labour market and lower inflation expectations boost optimism.
Consumers are still spending money on services including restaurants and plane tickets. And despite the dip in credit cards, consumers overall borrowed in June by more than forecast as they continued – for now – to tap loans for cars and tuition, according to Federal Reserve data.
The economic backdrop has changed in key ways since earlier this year, though. Credit availability has tightened, not only following the collapse of Silicon Valley Bank in March, but also as banks get more cautious amid recession risks later this year or in 2024.
Credit card rates have surged to about 22 per cent, according to WalletHub. Despite a gain in overall borrowing in the Fed data, outstanding revolving credit, which includes credit cards, fell for the first time in two years.
There is also evidence that consumers are looking for bargains. Off-price retailers TJX and Ross both reported better-than-forecast same-store sales growth in the second quarter and strong outlooks for the remainder of the year.
Mortgage rates have increased. That is crimping any extra spending by home buyers. And Americans’ excess savings since the start of the pandemic are expected to be depleted by the end of the third quarter, according to a report from the San Francisco Federal Reserve.
The labour market has underpinned Americans’ optimism and spending, with unemployment at a multidecade low in July. But payroll gains are slowing and wage growth has weakened by nearly half since 2020 to a 4.4 per cent pace in July.
Then there is inflation. The pace of price increases is finally easing, which is a relief for consumers even though it is still stubborn in food and shelter, two major spending categories. But for some companies, inflation has been masking declines in unit volumes as shoppers buy less.
“Everybody’s waiting for the other shoe to drop on the consumer,” said Lawrence Werther, chief US economist at Daiwa Capital Markets. “The warnings by corporate executives are well placed.”