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Retailers are being pushed more by consumers

Even when their highest prices go down, Americans are likely to continue to spend. Unfortunately for many retailers, however, less than that could be in the products that adorn their aisles.

Several gross earnings reports from major retailers have made investors question the health of the US consumer and have raised concerns that the next recession could be imminent. Walmart, for example, said last week that some customers have exchanged half a gallon for full gallons of milk. He also said buyers opted for delicatessen brands, lunch, bacon and private-label dairy products. Its results, as well as those of the competitive Target, scared the investors whose stocks had the biggest dip since the 1987 stock market.

Other investor calls have given a glimpse of who is saving: Ross Stores Chief Operating Officer Michael Hartshorn said last week that “higher fuel and food prices are squeezing discreet customer spending.” But with wages rising and household finances at their best for years, most people simply do not have the means to deal with inflation. They can continue to expand their spending, leading to continued growth in consumer spending and, ultimately, the economy.

Yes, rising prices are falling in wages, but wages are rising too – especially for the poorest people. The Federal Reserve Bank of Atlanta estimates that among workers in the lowest income quarter, the 12-month moving average of average annual wage growth was 6.4% in April compared to a year earlier. The 12-month moving average for annual inflation was only slightly higher at 6.5%. In addition, because total employment is much higher than a year ago, total wages in the US have outpaced price increases.

Meanwhile, the significant increase in cash that many Americans experienced in the aftermath of the pandemic remained largely intact. It is noteworthy that in all income layers, the Federal Reserve figures for the fourth quarter showed no signs of declining savings. The average 20% of households, for example, held 40% more cash and cash equivalents at the end of last year than at the end of 2019 and 15% more than at the end of 2020.

So why bargain in the grocery store and elsewhere? While some have a reasonable shortage of cash when prices rise sharply, as is the case for food and fuel, people tend to save more in the inflation-driven category rather than necessarily reducing overall.

While consumer spending will continue to rise in the coming months, multi-store sales could decline as the combination of declining concern about Covid-19 and high inflation leads to a steady shift to services.

People have devoted more of their spending to categories such as travel, eating out and entertaining outside the home. Restaurant sales have risen much more over the past year than store sales, for example, while cash receipts so far in May are about five times higher than a year ago. Mobility data from Google show that people are spending less time at home since the pandemic started.

Even when it comes to things, Target said last week that shoppers are moving away from categories like electronics and into travel and travel related categories. Luggage sales increased by more than 50% in the quarter ended April 30 compared to a year earlier, for example. And while clothing sales slowed sharply, the company recorded better sales of “trend-based clothing” (such as office wear and evening wear). The owner of TJ Maxx, TJX Cos. said U.S. comparable store sales in home-related categories fell 7% last quarter from a year earlier, while clothing sales in similar stores rose 6%.

Inflation could further accelerate the shift to more spending on services. The prices of consumer goods have risen much more than the prices of services, making the latter more attractive than goods before.

Exacerbating the problem for many retailers, higher prices on some of the items they sell seem to reduce sales of other items. Wholesale retailers such as Walmart and Target see consumers prioritizing groceries and household necessities over discretionary items.

The pandemic period was very good for many retailers, with strong demand despite rising prices and widening profit margins. Now comes the hangover.

I write to you Justin Lahart at justin.lahart@wsj.com and Jinjoo Lee at jinjoo.lee@wsj.com

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Retailers are being pushed more by consumers

Source link Retailers are being pushed more by consumers

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