Retail executives warn strong spending won’t last

Wal-Mart Inc., Target Inc. and Home Depot Inc. all beat Wall Street estimates for their fiscal second-quarter profits that ended in late July.At least, after the release of U.S. retail sales data last month, the results reinforced the image of resilience among consumers beyond expectationwith growth in most major categories.

But there were also signs of weakness, with retail executives taking pains to voice their concerns for the rest of the year. Consumers have yet to revive their appetite for big-ticket items and discretionary items, dragging down sales at Target and Home Depot despite better-than-expected profits. In addition, executives warned that new pressures such as rising interest rates and student loan repayments could dent consumer confidence in the second half of the year.

“Employment, wages and some deflation are helping our customers,” Walmart Chief Executive Doug McMillon concluded on a call with analysts on Thursday, summing up the tough economy facing customers. pressure. “But higher energy prices, a resumption of student loan payments, higher borrowing costs, tighter lending standards – and a reduction in excess savings – mean household budgets remain under pressure.”

Indeed, excess savings from the pandemic and rising wages from a historically tight labor market have been spurring purchases for some time. But consumers are increasingly turning to borrowing as savings dwindle — and credit tightens. Wage growth has slowed from last year’s peak. Macmillan fears student loan repayments will resume in October, hitting spending power for millions of households.

It’s also a big risk for Target, which may be the clearest sign of less active consumers. The retailer’s sales fell the most in nearly seven years as demand slumped in categories including apparel, home goods and hard-line goods, including electronics and toys.

The Minneapolis-based company’s cut It forecast full-year earnings and emphasized a cautious outlook.

“Consumers remain very cautious about discretionary spending,” Chief Operating Officer John Mulligan said on the earnings call.

Home Depot Total Transaction Volume reject Sales of big-ticket items, such as patio kits and large appliances, were weak. Chief Executive Ted Decker said “fears of a severe recession have mostly subsided,” while acknowledging that some shoppers have shifted more spending from goods to services in the wake of the outbreak.

early skeptics

This isn’t the first time retailers have doubted consumers. In the first quarter, executives and economists expected a correction in the economy, but so far there has been no major correction. In fact, Walmart said the back-to-school season is off to a good start, which usually bodes well for the holiday shopping season.

Of course, the retailer may just be trying to lower investor expectations so it can beat them later. Despite their cautious comments, consumers may continue to be surprised by the rise.

Sentiment has generally improved since June as a strong labor market and lower inflation expectations boosted optimism, according to an index from the University of Michigan. Consumers are still spending money on services like restaurants and flights.Despite the decline in the number of credit cards, consumers overall borrowed more than forecast They are continuing to use loans for cars and tuition, according to the Federal Reserve.

However, the economic backdrop has changed significantly since earlier this year. The supply of credit has tightened, not only after the collapse of a Silicon Valley bank in March, but also as banks have become more cautious about the risk of a recession later this year or in 2024.

According to statistics, credit card interest rates have soared to about 22% wallet center. While Fed data showed an increase in overall borrowing, outstanding revolving credit, including credit cards, fell for the first time in two years. That suggests sky-high interest rates are giving consumers hesitation.

Talent Market

There is also evidence that consumers are looking for bargains. Discount retailers TJX Cos. and Ross Stores Inc. both reported better-than-expected same-store sales growth in the second quarter and were upbeat about the outlook for the rest of the year.

mortgage rate The average rate on a 30-year contract soared to 7.09% this week, the highest level since 2002. This discourages additional spending by homebuyers. Americans’ excess savings since the start of the pandemic is expected to be depleted by the end of the third quarter, according to a report. Report From the San Francisco Fed.

The labor market has underpinned optimism and spending among Americans, with unemployment at its lowest level in decades in July. But wage growth is slowing, and wage growth, still high by pre-pandemic standards, has nearly halved since 2020, rising 4.4% in July.

Then there is inflation. The pace of price increases is finally slowing, which is a relief to consumers, even as they remain stubborn on two major spending categories, food and housing. But for some companies, inflation masks a decline in unit sales as shoppers buy fewer.

ConAgra Brands said last month that Americans reduce Regarding food purchases.there are even sign They skimp on everyday essentials like toilet paper and toothpaste.

“Everyone is waiting for the other shoe to fall on consumers,” said Lawrence Witter, chief U.S. economist at Daiwa Capital Markets. Tighter credit, a weaker job market and lower savings will all lead to a slowdown in consumer spending, he said. “The warnings of corporate executives are justified.”