The consumer is stressed

Bottom line

Back-to-School (BTS) spending during the first three months of this important retail sales season through August suffered their weakest results since the global financial crisis in 2008, rising by a tepid 2% year over year (y/y). This should not be a surprise to investors, as consumers—particularly at the lower end of the income and wealth spectrum—have been tightening their belts for the past two years, due to a deteriorating labor market, persistent inflationary pressures, declining business and consumer confidence and rising personal savings rates.

BTS spending slows Nominal retail sales in August were marginally better than expected, rising by a modest 0.1% month-over-month (m/m), compared with consensus expectations for a decline of 0.2%. But July results were revised up from a 1.0% m/m gain to a 1.1% increase, and June was revised down a tick to a final decline of 0.3%. 

Nine of the 14 retail-sales categories were unchanged or declined in August, led by m/m declines of 1.2% at gasoline stations and by 1.1% in both electronics and at department stores. August was salvaged by a strong 1.4% m/m gain in on-line purchases, which now account for 17.4% of all retail sales.

July’s relatively strong results were boosted by Amazon’s annual Prime Day on July 16-17, with sales of $14.2 billion, which rose by a much stronger-than-expected 11% from 2023. We believe that some BTS spending was pulled forward from August into July, as cash-strapped consumers were tempted by Amazon’s discounts.

Control results (which exclude spending on food, gas, autos and building materials, and are a direct input into the Commerce Department’s GDP calculations) rose in August by an in-line 0.3% m/m. July control results ticked up to a gain of 0.4% m/m, and June was unrevised at a final gain of 0.9% m/m. 

Back-to-School is a four-month retail sales season BTS spending begins in June, so that college students and parents won’t find themselves out of stock on electronics, apparel, and dorm-room furnishings. July and August are the heart of BTS season. But many parents and students hold onto some of their apparel budget until September, to see what fashions are popular and take advantage of Labor Day sales.

Implications for Christmas So, with June, July and August spending now in the books, BTS spending thus far has risen by only 2.0% y/y, the weakest results since it lost 8.3% y/y during the Global Financial Crisis in 2009. That compares with a 3.0% y/y gain during the 2023 BTS season, which has averaged a normalized gain of 4.3% y/y over the past 15 years. During this year’s Easter/Passover “Marpril” season, March and April retail sales rose by a combined 3.2% y/y in 2023. Deloitte believes that upcoming Christmas/Hanukah sales will rise by a muted 2.3% to 3.3%, while Mastercard is expecting a 3.2% y/y gain. In 2023, Christmas sales for the four-month season from October through January rose by only 2.7%, the weakest holiday sales in five years. These three important retail sales seasons, “Marpril,” BTS and Christmas, share a 73% positive correlation over the past 30 years, and personal consumption accounts for 70% of GDP. 

Personal savings rate rising The personal saving rate spiked from 7% pre-pandemic in January 2020 to a record 32% in April 2020 and to 25.9% in March 2021, due to overly generous fiscal stimulus benefits from the CARES Act and American Rescue Plan ARP, respectively. But the personal savings rate then plunged to a 15-year low of 2% in June 2022, well below the 50-year average of 7.4%. Over the past two years, the savings rate has risen to 4.8% in August 2024, as stressed consumers are concerned about spike in the unemployment rate from a 53-year low of 3.4% in April 2023 to 4.2% in August 2024. This surge has triggered the Sahm Rule in each of the past two months, which states that if the rate of unemployment increases by 0.5% or more on a rolling three-month basis within 12 months or less, then the economy typically falls into recession. A rising savings rate means less spending on retail goods and services, which will slow economic growth.

Persistent inflation Despite the general decline in inflation over the past two years, prices are still 20-30% higher than they were pre-pandemic, which has negatively impacted consumption. The nominal Consumer Price Index (CPI) of retail inflation has plummeted from a 41-year peak of 9.1% in June 2022 to 2.5% in August 2024. But the core Producer Price Index (PPI) of wholesale inflation has surged from 1.8% y/y in December 2023 to 2.4% in August 2024. Although the core Personal Consumption Expenditure (PCE) index – which is the Federal Reserve’s preferred measure of inflation -- has declined from a peak of 5.7% in February 2022, it stalled at 2.6% y/y in each of the last three months through July 2024, and it ticked up to 2.7% in August. In last week’s Summary of Economic Projections report, the Fed forecast that the core PCE would grind back down to 2.6% by the end of this year, on its way to its 2% target by year-end 2026.

Declining business and consumer confidence could pressure consumption:

• Leading Economic Indicator (LEI) was unchanged or has declined on a m/m basis in each of the past 30 months through July 2024. 
• Conference Board’s Consumer Confidence Index suffered its worst m/m decline in three years in September 2024, falling to a three-month low of 98.7, down from 114 in July 2023. 
• National Federation of Independent Business small-business optimism index fell to a three-month low of 91.2 in August 2024, down sharply from 93.7 in July, marking its largest m/m decline in more than two years.
• Michigan Consumer Sentiment Index fell from a three-year high of 79.4 in March 2024 to 70.1 in September 2024 
• NAHB Housing Market Index of builder confidence fell from a one-year high of 56 in July 2023 to 41 in September 2024.

Earnings estimates coming down We’re a fortnight away from the start of the third-quarter reporting season for the S&P 500 and FactSet’s estimates for revenues and earnings are declining. Earnings per share are now expected to increase by 3.7% y/y, half as strong as estimates for a 7.8% y/y gain at the start of the third quarter. By comparison, earnings grew by a robust 11% y/y in the second quarter, which marked the strongest earnings growth since the fourth quarter of 2021. 

Strikes and hurricane could exacerbate a bad situation With the all-important Christmas season rapidly approaching, 47,000 dockworkers representing three dozen east coast and gulf ports are threatening to strike on October 1 for the first time since 1977. They earn $39 per hour in their expiring six-year contract, and they want at least a 71% increase to $69 per hour over the course of a new six-year contract, with a prohibition of introducing more technology and automation.

An estimated 56% of all U.S. imports and 68% of exports flow from these ports, and a shutdown would re-introduce the supply chain snags we experienced during Covid. Despite J.P. Morgan’s estimate that the strike could cost the U.S. economy $5 billion daily, the White House has said that it will not invoke the Taft-Hartley Act to ensure the continued flow of commerce. 

A prolonged strike could result in slower economic growth and higher levels of inflation, as companies find more costly means of shipping their goods. Combined with 33,000 striking Boeing workers, the October payroll report on November 1 could be rocked just prior to the election. 

In addition, Hurricane Helene, which made landfall this week, is thought to be the most powerful hurricane in the Florida Panhandle and Gulf region in history. That potential damage could worsen the economic, inflation and labor-market picture. 

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