The all-powerful American consumer is struggling to keep up amid the highest inflation in 40 years.
This earnings season, US retailers have struggled to find their feet as a result, with spending patterns having changed and supply chain problems remaining.
Target sparked concerns about the health of the retail sector in June when it cut its profit forecast, saying it would cut excess inventory, cancel orders and take a hard look at its expenses as consumers tighten their belts.
After that, a series of warnings from industry leaders including Walmart and Best Buy primed the pump for a series of less-than-stellar earnings reports from retailers.
Now, as the dust settles on the spring earnings season, financial results and comments from retailers reveal some undeniable truths about the impact of inflation on consumers of different income levels and where consumer prices are likely to go from here.
“A big theme that I see is that people are still spending, but they’re spending differently, and low- and middle-income households have certainly made the most adjustments and been hit the hardest by inflation,” said Ted Rossman, a senior told the industry Bankrate analyst Luck.
Although US consumers have been remarkably resilient in the face of extremely difficult economic times, there are signs that may be changing.
“They are seeing some worrying signs”
As expected, retailers’ earnings show that low- and middle-income consumers have been hit hardest by the price hike. Rossman noted that Macy’s said in its second-quarter earnings call that it sees a “division in the retail market” where higher-income consumers continue to spend, while lower- and middle-income consumers make big changes.
“So overall, I think retailers are feeling a little bit nervous. And they’re seeing some worrying signs,” he said.
This reality is also reflected in Nordstrom’s recently announced earnings results. The company cut its growth forecast on Thursday, citing a drop in customer demand, and CEO Erik Nordstrom said he sees sales falling at Nordstrom Rack, the company’s discount department chain, much more than at its main stores.
“The softening trend was more significant in customer segments with the lowest income profile … while we saw greater resilience in the higher income segments,” Nordstrom said on the company’s earnings call.
Retailers’ profits aside, there’s plenty of economic evidence to show just how devastating inflation has been for low- and middle-income Americans.
Looking at annual growth in US consumer spending by income level, it’s clear that lower-income consumers were forced to cut costs over the past year, while their affluent peers actually spent more.
Americans making more than $100,000 increased their spending by 20% between July 2021 and July 2022, while those making between $50,000 and $99,999 spent 8% more over the same period, and consumers making less than $50,000 cut spending by 1%, data from market research company Morning Consult shows.
“Real spending increased year over year in July in nearly every category we tracked for those earning $100,000 or more. The opposite was often true for adults earning less than $100,000, for whom spending declined in most categories,” said Morning Consult chief consumer spending economist Scott Brave. Luck.
Increased spending by higher-income consumers, along with falling gas prices, helped U.S. retail sales remain resilient in July, despite inflation levels not seen since the early 1980s. But even with With prices at the pump plunging 23% to a national average of just $3.86 a gallon since June 14, about 83% of Americans say they are cutting back on spending because of inflation, according to a Provident Bank survey.
That’s not exactly surprising, given that real average hourly earnings, or wages adjusted for inflation, fell 3 percent year-over-year last month, the Bureau of Labor Statistics reported on Aug. 10.
“US consumers got a welcome respite from inflation’s sting in July as gas prices eased significantly. But at over 6%, inflation still remains too high to provide lasting comfort,” Brave said. “Spending growth has been resilient but it’s clear from Morning Consult’s latest high-frequency Economic Intelligence data that low- and middle-income households face tough decisions as inflation continues to weigh on consumers’ wallets.”
This squeeze is evident in the decline in the percentage of consumers who have money left over after paying and their monthly expenses.
Just 39 percent of U.S. adults earning less than $50,000 a year had money left over after paying their expenses each month as of July, according to Morning Consult data. That’s down from 45% just a year ago. By comparison, 59% of US adults making between $50,000 and $99,999 had money left over after paying their monthly expenses in July, while nearly 80% of those making more than $100,000 could say the same.
The personal savings rate, which measures consumers’ savings as a percentage of their disposable income, also remains well below pre-pandemic levels at just 5%, compared to 8.3% in February 2020. It’s another sign that consumers are struggling to make The extremes meet in these tough economic times, according to Bankrate’s Rossman.
And Walmart’s earnings show that higher-income consumers are starting to change how they spend as real wages decline. The retail giant is seeing higher-income households spend more on groceries and other essentials in their stores, when in the past they may have shopped at higher-end stores.
Walmart reported its second-quarter financial results last week and surprised analysts with an 8% sales increase. But the company also saw its earnings fall and gave weaker-than-expected future guidance for investors.
Management expects same-store sales to rise just 3% in the second half of the year, excluding fuel, and adjusted earnings per share to fall between 9% and 11% in 2022 as consumers cut back on spending.
“People are really focused on price now, regardless of income level,” Walmart CEO Doug McMillon told CNBC last week. “And the more so [inflation] last, the longer this will happen.”
Bankrate’s Ted Rossman noted that this is evidence that while higher-income consumers may not be cutting back on spending, they are certainly changing the way they spend and look for value.
“There’s definitely a good chunk of discretionary income still out there at the high end. And I’ve seen positive things from many luxury retailers. But then that’s offset by that Walmart comment,” Rossman said.
What could this mean for inflation going forward?
A slowdown in consumer spending and moves by retailers to cut prices to get rid of excess inventory will likely help dampen inflation going forward, but the effects won’t be dramatic.
“I don’t think it’s going to have a huge impact on the overall inflation numbers just because things like housing, gas and food make up a huge percentage of the consumer price index (CPI) and other inflation gauges,” Rossman said. . “So the fact that Target and other stores are having sales this summer is good for consumers, but I don’t think it’s going to move the needle that much on the broader inflation data.”
However, said EY Parthenon’s Chief Economist Gregory Daco Luck that it expects consumer spending growth to slow from 1.5% this spring to just 1.2% by the end of next quarter, and that will help lower inflation.
“We expect inflation to continue to decline in the coming months due to lower energy prices, easing consumer spending momentum and higher interest rates, but the decline will be gradual as higher housing and health care inflation along with firmer foods limit the fall”. he said.
Bank of America sees a similar trend moving forward. One of the investment bank’s economic research teams, led by chief US economist Michael Gapen, said in a research note on Friday that they expect inflation – as measured by the Fed’s favorite personal consumption expenditure (PCE) price index – to ease to just 4.8% by the end of the year and 2.4% in 2023.
The PCE price index rose 6.3 percent from a year ago in July, up from 6.8 percent in June, the Bureau of Economic Analysis said Friday.
This story was originally featured on Fortune.com