Evidence is mounting that many Americans have reached their limit for tolerating higher prices, raising questions about how much consumer expenditures will continue to power US economic growth this year.
After spending freely with savings built up during the coronavirus pandemic and income fuelled by a healthy job market, consumers are becoming more cautious, according to comments from retail and consumer goods executives and official data.
Retail sales increased 0.6 per cent in February from the previous month, missing expectations by economists for a 0.8 per cent gain, according to Census Bureau data released this week. The increase reversed a 1.1 per cent decline from December to January.
“We did not begin the year with healthy robust consumer spending that we had at the end of last year,” said Steve Ricchiuto, chief economist at Mizuho Securities. “The economy is losing some momentum.”
January’s figure was revised lower from a previous estimate, the fourth downward revision in a row.
Jeffrey Roach, chief economist at LPL, said the first half of the year was “certainly” going to be “quite sluggish” but that he expected growth to rebound in the second half, as inflation continues to decelerate and the Federal Reserve loosens monetary policy.
Although inflation is down about two-thirds from its peak in the summer of 2022, consumer price growth unexpectedly rose to 3.2 per cent in February, which was largely driven by price pressures for services.
The University of Michigan’s US consumer sentiment reading edged down in March to a level well above the worst of inflation in the summer of 2022, but below readings that were common before the pandemic.
“Inflation is back down . . . but the compounding of those prices for a year and a half means that prices are higher, so consumers are feeling that much more than they did a year and a half ago,” said Stephanie Cegielski, vice-president of research at ICSC, a shopping centre industry group.
After Kraft Heinz enacted a series of price rises in 2023, the maker of Heinz ketchup and Grey Poupon mustard last month reported declining organic net sales for the first time since 2021, with volumes also sliding, with a crucial driver being weak demand in North America.
Similarly, PepsiCo chief executive Ramon Laguarta said in a statement in February that consumer behaviour had reverted back to pre-pandemic norms.
“We’re seeing a bit of a slowdown in the US, both the food category and the beverage category in [the fourth quarter],” he said on a call with investors. “Part of that is a slowdown due to pricing and disposable income.”
Many retailers had raised prices to pass on higher commodity and operating expenses, causing some companies to report bumper sales growth, but as inflation decelerates and consumers reject higher prices, many of those groups expect sales growth to slow this year.
McDonald’s in February reported softer sales in the US in its most recent quarter as lower-income customers purchased cheaper menu items, and forecast same-store sales growth to return to a historical average between 3-4 per cent, down from 9 per cent last year.
“The days of sales growth being driven by these big price increases, those are probably over,” said Brian Yarbrough, an analyst at Edward Jones.
Big-box retailer Target said last week that it expected consumers to continue to face price pressures this year.
“Consumers say they still feel stretched,” said Christina Hennington, Target’s chief growth officer. “They are balancing a lot and having to make trade-offs to meet the needs of their families . . . We expect consumers will remain highly value conscious.”
Although traffic at Target’s stores improved in the holiday quarter it still declined 1.7 per cent from a year ago, while the average transaction amount slid 2.8 per cent as shoppers sought out deals.
Some consumers have also started to pull back spending on services such as travel. Marriott warned in February of slower revenue growth this year and Expedia last month forecast softer growth in sales and bookings as the post-pandemic travel boom fades.
After gains in real wages and savings boosted consumer spending that helped the economy re-emerge from the depths of the pandemic, Americans have become more cautious, as savings melt away and wage gains moderate.
“Real wages by all measures are below where they were in January 2021 when President [Joe] Biden took office,” said Steve Englander, a strategist at Standard Chartered. “They have been catching up a bit, but there is something to the argument that people are dissatisfied because they have jobs but unsatisfactory purchasing power.”
January’s personal consumption and expenditures report showed that consumer spending, adjusted for inflation, declined 0.1 per cent from December. Although the personal savings rate ticked up to 3.8 per cent, it is still far below pre-pandemic levels. The personal savings rate in January 2020 was 7.9 per cent.
“In the holiday season we saw people start to go through the last amount of savings that they had,” said Katie Thomas, who leads the Kearney Consumer Institute, a management consulting firm.
Although inflation has hit low-income consumers the hardest, some retailers have noticed higher-income consumers feeling the squeeze.
The chief executive of cut-price retailer Dollar Tree, Rick Dreiling, said on a call with investors this week that its fastest-growing customer demographic earns more than $125,000 a year.
Similarly, Walmart’s chief executive John Rainey said in February that one of the biggest contributors to market share gained from other retailers in its fourth quarter was from consumers who make more than $100,000.
“A lot of people want to feel like they’re getting the best bang for their buck,” said Thomas at Kearney Consumer Institute. “People on both sides of the income spectrum are feeling a little bit more stretched than they were a year ago.”
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