According to the retail sales report from last week, spending was flat, but when you exclude sales for auto and gas, spending increased by 0.7% from June to July. The retail report measures consumer spending/demand for goods. Gasoline prices have steadily declined over the last 9 weeks which has enabled consumers to spend money on other things. Since many students are starting to return to school after summer break, back-to-school spending has also contributed to the boost in sales. Spending on electronics, personal care products, and house improvements all increased as a result. Amazon’s Prime Day, which recorded the biggest sales in the history of the event, was another significant factor. Many people flocked to online sales during the pandemic, and even as many switch their purchasing from products to services, e-commerce is still a significant component of consumer spending.

Despite high inflation and swift monetary tightening, household consumption has shown to be quite resilient. Household balance sheets are still strong and haven’t yet shown any signs of weakness. It can take some time for the effects of rising interest rates to be felt in the economy, so a slowdown is hard to pinpoint.

Recent earnings reports from major retailers show conflicting trends regarding future consumer spending on goods. Target (TGT) reported a higher than anticipated loss in its earnings as measures made to manage inventory levels drown margin pressure, but Home Depot (HD) and Walmart (WMT) reported solid earnings and increased their guidance for the year. Target continued to maintain its full-year revenue estimates despite the poor results. The image below shows that inventory levels have been increasing as an attempt to keep up with consumer demand.

On the other hand, Kohl’s (KSS) not only posted lower-than-expected earnings but also lowered its full-year forecast due to the expectation that high inflation will further impact demand. Later this week, when Macy’s (M), Nordstrom (JWN), and other retailers release their earnings reports, a clearer picture of the retail sector should form.

Although spending on goods is mixed, it may be a different story for services. The CEO of Target mentioned during the earnings call that they anticipate consumers to continue shifting their spending priorities from products to services. Because people are getting back to their pre-pandemic routines, especially during the summer, we’ve seen hard hit businesses come back to life. Airlines are busy, people are eating at restaurants, and hotel occupancy is at an all-time high. The trend toward services, which reflects customers’ desire to return to their prior way of life, is beneficial for all industries, not just service businesses. Additionally, it might reduce the strain on overloaded supply chains and aid the Federal Reserve in reducing inflation.

It is challenging to make predictions about future spending because tightening monetary policy act as a drag on it. However, it is clear that current consumer spending is robust and consumer balance sheets remain strong.

Andrew M. Ochoa
Portfolio Administrator