Check the health of the American consumer

To paraphrase Mark Twain, the rumors about the death of the American consumer are greatly exaggerated. As discussed last week, in the week of May 16, fears for the American consumer increased when Walmart

WMT
(WMT) and Target

TGT
(TGT) reported disappointing gains. Retailers performed less this week, with many down about 20%.

Last week’s earnings reports from more retailers brought relief and a sharp rise to the group. Retailers rose 8.8 percent for the week, while the S&P 500 rose 6.6 percent. This performance erased the sharp losses for retailers from the previous week, although the group still did not perform lower than the S&P 500 throughout the two-week period.

A little history of the impact of the pandemic on consumer spending will be helpful before delving into the trends and topics that are emerging now. While all costs fell in the first months of the pandemic, the cost of services fell more sharply than the cost of goods. Given the desire for social distancing, a decline in the cost of services should be expected. As the majority of the population spends more time at home and is supported by government support, the cost of goods is recovering quickly and exceeding the peak before the pandemic by mid-2020! As covid infections continue to force people to avoid personal contact, the cost of services does not exceed pre-covid levels until mid-2021.

Profits from retailers in the first quarter reflect macroeconomic data, which show that spending on services is now growing faster than on goods. Costs also shifted to consumables such as food, beverages and fuel relative to common goods in commodity costs. Both Walmart and Target reported higher revenue (sales) compared to the same quarter last year, so consumers are still spending. Households seem to be turning to more spending on services, especially travel and leisure, at the expense of home purchases for things like furniture. For example, Southwest Airlines

LUV
(LUV) and JetBlue Airways

JBLU
(JBLU) recently announced in advance that second-quarter revenue was higher than expected.

Expenditure due to inflation also affects their revenue, but in general stores are able to pass on some of the increases to consumers. Supply chain costs were holding back quarterly earnings. Companies with a high percentage of imports have been hit by huge increases in shipping costs. Walmart and Target have a large share of imported items, which also helps explain lost profits. Home Depot

HD
(HD) has many imported products, but owns several container vessels, so it has managed to avoid some of the pressure of ocean shipping costs. General dollar

GD
(DG) and dollar tree

DLTR
(DLTR) showed resilience in the category of discount stores last week, focusing on the sale of basic consumables to lower-income households and less exposure to higher delivery costs of imported products. Changing cost patterns, coupled with supply chain challenges, has hit some retailers with surplus stocks for the first time since the pandemic recovered.

There is evidence that the lower class consumer is feeling the pinch of rising food and fuel prices. Walmart noted that some consumers trade up to private label offers, and discounters have seen greater demand for basic consumables compared to general merchandise.

Despite the inflationary challenges for consumers, households have accumulated significant savings that can be used to supplement income to support consumption. At present, however, reduced consumer confidence is a risk to consumer spending.

In summary, companies’ macroeconomic data and profits point to a change in consumer spending issues rather than the end of American consumer power. According to JPMorgan (JPM), Chase credit card costs increase every month from February to May. As the chances of a recession in 2023 increase as the Federal Reserve continues to raise interest rates to fight inflation, the strength of consumption makes an economic downturn less likely to occur in the short term. The labor market remains crucial for this perspective. History suggests that spending must continue as long as the low unemployment rate maintains higher wages, despite declining consumer sentiment. The May Employment Report will be closely monitored for signs of a labor market gap, and weekly unemployment applications will be vital as an indicator of higher frequency.

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