Evidence is mounting that many Americans have reached their limit on higher prices, raising questions about the extent to which consumer spending will continue to fuel US economic growth this year.
After spending freely with savings accumulated during the coronavirus pandemic and income fueled by a healthy job market, consumers are becoming more cautious, according to comments from consumer goods and retail executives and official data.
Retail sales rose 0.6 percent in February from the previous month, missing economists' expectations for a 0.8 percent increase, according to Census Bureau data released this week. The increase reflected a 1.1 percent decline from December to January.
“We did not start the year with as strong and healthy consumer spending as we had at the end of last year,” said Steve Ricciuto, chief economist at Mizuho Securities. “The economy is losing some momentum.”
The January figure was revised downward from the previous estimate, which is the fourth downward revision in a row.
Jeffrey Roach, chief economist at LPL, said the first half of the year would be “certainly very slow” but he expected growth to rebound in the second half, with inflation continuing to slow and the Fed easing monetary policy. .
Although inflation fell by about two-thirds from its peak in the summer of 2022, consumer price growth unexpectedly rose to 3.2 percent in February, which was largely driven by service price pressures.
The University of Michigan's US consumer confidence reading in March fell to a level well above the worst levels of inflation in the summer of 2022, but below readings that were common before the pandemic.
“Inflation is back down… doubling these prices for a year and a half means prices are higher, so consumers are feeling that a lot more than they were,” said Stephanie Cegielski, vice president of research at ICSC, a marketing firm. A year and a half ago. Center Industry Group.
After Kraft Heinz issued a series of price increases in 2023, the maker of Heinz ketchup and Gray Poupon mustard last month announced organic net sales fell for the first time since 2021, with volumes also falling, the crucial driver being weak demand in North America. . .
Likewise, PepsiCo CEO Ramon Laguarta said in a statement in February that consumer behavior has returned to pre-pandemic norms.
“We are seeing a bit of a slowdown in the US, both in the food category and the beverage category [the fourth quarter]He said in a call with investors. “Part of that is the slowdown due to pricing and disposable income.”
Many retailers have raised prices to pass on higher merchandise and operating expenses, prompting some companies to report significant sales growth, but with inflation slowing and consumers rejecting higher prices, many of these groups expect sales growth to slow this year.
McDonald's reported in February that its U.S. sales declined in its most recent quarter, as lower-income customers bought cheaper menu items, and it expected same-store sales growth to return to a historical average of 3-4 percent, down from 9 in hundred last year. year.
“The days of sales growth driven by these large price increases may be over,” said Brian Yarbrough, an analyst at Edward Jones.
Major retailer Target said last week that it expects consumers to continue to face price pressures this year.
“Consumers say they still feel overwhelmed,” said Christina Hennington, Target's director of growth. “They're balancing a lot and having to make trade-offs to meet their family's needs. . . . We expect consumers to remain very value-conscious.”
Although traffic at Target stores improved in the holiday quarter, it was still down 1.7 percent from a year ago, while the average transaction amount fell 2.8 percent as shoppers sought deals.
Some consumers have also begun to cut back on spending on services such as travel. Marriott warned in February of slower revenue growth this year, and Expedia last month forecast lower 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 emerge from the depths of the pandemic, Americans have become more cautious, with savings dissolving and wage gains moderating.
“Real wages by all measures are lower than they were in January 2021 when Pres [Joe] “Biden has taken office,” said Steve Englander, a strategist at Standard Chartered Bank. “They have been catching up a little bit, but there is something behind the argument that people are dissatisfied because they have jobs but unsatisfactory purchasing power.”
The January Personal Consumption and Expenditures report showed that consumer spending, adjusted for inflation, fell by 0.1 percent compared to December. Although the personal savings rate has risen to 3.8 percent, it is still well below pre-pandemic levels. The personal savings rate in January 2020 was 7.9 percent.
“In the holiday season, we saw people start to eat the last of their savings,” said Katie Thomas, who leads the Kearney Consumer Institute, a management consulting firm.
Although inflation has hit lower-income consumers hard, some retailers have noticed that higher-income consumers are feeling the pressure.
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Its fastest-growing customer demographic earns more than $125,000 annually, Rick Dreiling, CEO of discount retailer Dollar Tree, said on a call with investors this week.
Likewise, Walmart CEO John Rennie said in February that one of the biggest contributors to market share gained from other retailers in the fourth quarter was consumers earning more than $100,000.
“A lot of people want to feel like they're getting the best value for the money they're spending,” said Thomas of the Kearney Consumer Institute. “People on both sides of the income spectrum are feeling more stressed than they were a year ago.”
