The US consumer seems to be on a solid footing today.
Spending volumes increased in both January and February and look to be on course for a positive year overall in 2023.
Spending is clearly helped by a red hot jobs market. January saw half a million new jobs created and while that pace will not be maintained, unemployment could well hold onto a low 3% handle for the rest of the year, an amazing result so late in the economic cycle.
Wages are increasing at about 4% p.a. based on the most recent employment report, and job openings are at record levels.
This positive macro message stands behind the very significant jump we saw in the consumer confidence survey from Michigan University up 7% in a year.
So the income picture is very supportive. But what about the other side of the equation – the household balance sheet? Here again we see a very constructive picture. Covid saw a jump in saving and an improvement in household net wealth.
Excess savings still remain impressive post Covid, but now they are in a downward arc. Savings are now being depleted. About 40% of excess savings have probably been spent so far – by end 2023 that will be closer to 70%. So, while still a factor, most of the wealth effect on spending is probably behind us.
Consumers seem to be in a comfortable credit position today with little sign of stress so far, as delinquency rates on credit cards remain low. But as interest rates move higher and higher, this is likely to change.
So the 2023 US consumer outlook is somewhat of a tug of war between the two key forces of income and wealth.
Can we add any clarity by moving from Wall Street to Main Street, and investigate what’s actually happening on the ground? Are these trends being played out at the check-out or being discussed in the boardroom?
We are just coming through the Q4 2022 earnings season in the US, where CEOs and CFOs try to guide investor expectations for 2023. Looking at the retail sector, if there was one word that permeates what CEOs have been saying in the past few weeks it is uncertainty. Many retailers are coming off resilient sales figures since pandemic but now feel that some of those trends are played out and the future, especially in the second half of 2023, may see some moderation.
Walmart, the retail giant, is a good barometer of what’s happening on Main Street. They do see some gains in 2023 in the face of what they see as stubborn inflation that’s depleting consumer wallets. However they see a risk of sales moderating in the second half of the year. Walmart specifically mentions a weaker household balance sheet and declining savings as a concern.
Home Depot, the world’s biggest home improvement company, echoes this weaker 2023 view but for them the deceleration has already started. Roofing and flooring products have been especially weak suggesting a lot of the pent-up home improvement is behind us.
The lack of visibility into 2023, is repeated across many widely diverse retail CEO comments from American Eagle to Dollar Tree.
Retail CEOs do see a potential weakening at some point in 2023. This may also be in the US Central Bank’s playbook as they look for some of the heat to be taken out of the economy. A pull-back would also be in line with a recent PWC survey which shows 96% of global consumers intend to adopt cost saving measures over the next 6 months.
Consumption matters. It accounts for close to 70% of US GDP, and today near-term prospects seem very finely balanced.
Target Corporation for example, with nearly 2000 stores across the US, probably sums it up best. The company said last week that the retail landscape is unpredictable and that they have seen a cutback on discretionary items as consumers make room for the higher prices in necessities. Brian Cornell, Target CEO, feels certain aspects of the retail environment have changed forever.
The clearest indication of the unpredictability is that while Target expect their 2023 sales to move in low single digits
– they’re just not sure if that’s up or down!
Tradewinds 