SUPPORT: Consumption dominates the US economy, at 2/3 of GDP, and its resilience the biggest reason it’s not in recession. The good news is consumers still have significant pandemic savings (see chart), and less inflation will return purchasing power. This is a buffer to a weakening jobs market that will depress confidence further, and the broader macro slowdown. But so far it’s been a case of ‘see what they buy, not what they say’. Industry forecasts are for a small deceleration from last year’s 7% retail growth to a still above average 4-6% rate. But the shift in spending from discretionary and goods to staples and services is clearly on show in Q1 earnings and driving share price divergence.
SAVINGS: The combo of unprecedented government support and lower services spending saw an estimated $2.1 trillion pandemic savings boom, equal to 8% of GDP. Three quarters of these savings have now been spent down. But an estimated $500 billion remains, with liquid savings higher than normal across all income levels. This is enough to support the consumer at least until the end of this year. This is a key buffer to the mounting macro and jobs market headwinds from the 1) lagged impact of 5% interest rates, 2) a smouldering banks scare, and 3) coming debt-ceiling spending cuts.
EARNINGS: But the consumer is spending differently. Personal care and groceries staples along with luxury are growing. Online is seeing structural market share gains. Walmart (WMT), the world’s biggest retailer, reports today, with same-store-sales still rising c5%. Discounters, like Dollar General (DG), are adding over 1,200 stores this year. But bigger ticket and discretionary goods suffer from higher financing costs, a pandemic demand hangover, and low confidence. This is clear from home improvement to furniture, and Home Depot’s (HD) warning to Target’s(TGT) weak Q2 outlook.
All data, figures & charts are valid as of 17/05/2023