Inflated Hopes: Spending in a Crisis

Recent forecasts have suggested that inflation could reach 18% next year (Citi) and that household energy prices could hit £6,000 (Auxlione) by next spring.

Our own Optimism Index shows that consumers have never been gloomier. Other indices confirm the ingrained pessimism of the British consumer citizen.

You’d expect that consumers would be following the example of squirrels at this time of year by gathering and depositing nuts to see them through the winter.

Instead, consumers have apparently gone nuts by hitting the shops like squirrels at a fallen bird-feeder. Retail sales were higher in July than they were in June as this recent article makes clear. The article goes on to suggest some explanations for this irrational behaviour.

Barclaycard also reported strong growth in discretionary spending in July – with spending up 7.7% on the previous month.

Trajectory’s interest was piqued.

With the financial apocalypse at hand, perhaps consumers are enjoying themselves while they can and living in the moment? Perhaps consumers are emboldened by the knowledge that unemployment is low and that the labour market is tight? Perhaps.

Years ago, your youthful correspondent was lucky enough to work with a genuinely wise colleague who insisted on referring to the source material to verify a story.

I have done so. The source material is the ONS Retail Sales data.  Retail sales did indeed climb in July, however volume sales (which are; “calculated by taking the value estimates and adjusting to remove the impact of price changes”) have been decline since last summer. In the three months to July 2022, sales volumes fell by 1.2% when compared to the previous three months. Food store volumes rose by 0.1% in July with the ONS noting that; “…retailers are seeing a decline in volumes sold because of increased food prices and cost of living impacts.” Our most recent Optimism Index echoes this.

The British Retail Consortium suggested that the growth in spending in July was partly weather related as consumers bought fans, summer clothes and picnic hampers. The BRC remains downbeat about the rest of the year.

Meanwhile, in America…

In America, a slew of brands have enjoyed strong sales in the last few months; Walmart, Target, Home Depot, Lowe, GM, Visa, Starbucks and MasterCard have grown sales recently.

Elon Musk has observed that: “Consumer sentiment is all over the map … but we have so much excess demand.”

A recent article in the FT suggests that the paradox of extravagance is partly powered by confidence in employment. The labour market is tight in the United States, something that gives workers a certain swagger when then they step through the door of their local Walmart.  Savings are also quite high.

…all is not as it seems.

We note that consumer spending in the United States peaked just before the last recession in 2008/09.  According to the never less than enthralling Monthly Labor Review from the US Bureau of Labor Statistics; “In the last quarter of 2007, the first official quarter of the recession, consumer spending peaked at $9.3 trillion.”

The American pollsters, Morning Consult, have registered a rise in consumption expenditures in July. While this initially looks promising, much of it is driven by the wealthiest consumers; “Robust spending by higher-earning adults is masking the degree to which purchasing power is deteriorating across the income distribution of US consumers … as persistently high inflation puts growing pressure on household budgets, adults earning less than $100,000 are disproportionately feeling squeezed.”

Morning Consult make the point that inflation is less of a problem for the wealthy than the poor.

Retailers respond.

While many retailers have enjoyed a strong early-summer trading period, they are braced for a difficult autumn.

Walmart’s CEO recently said; “We expect inflation to continue to influence the choices that families make and we are adjusting to that reality so we can help them more.”

Target’s CEO expects consumers to want to celebrate the forthcoming holiday seasons in the US but in a value-for-money way. This suggests the return of a trend that we witnessed in the UK in the last recession – everyday exceptional (when consumers celebrate small occasions with value-conscious premium food and drink such as prosecco). Walmart will be selling a $50 Thanksgiving meal for four and it’s hard to find a better example of the trend.

It’s worth noting that inflation in the United States is running at 8.5% – lower than it is here.

So what?

• Sometimes the media leads rather than reports events. Some of the reporting around consumer behaviour this summer has been quite selective and has suggested that consumers are behaving irrationally when in fact the majority are not.
• It’s not unusual for consumer spending to rise before a recession but that doesn’t necessarily mean that consumers are indulging in a hedonistic last hurrah.
• Many American retailers including Foot Locker, Macy’s and Walmart all anticipate a “competitive promotional climate” this autumn. Consumers are expected to be alive to deals and offers. There is downward pressure on margins.
• The Everyday Exceptional trend offers opportunities to grocers. Given that many of these occasions can be spontaneous, convenience stores may benefit more than large format stores or home delivery.