Although consumer spending appeared strong in the latest reading, the quarterly results from Walmart and Target are telling us a different story. Over the previous week, the American retail giants have announced their quarterly results and, despite the revenues beating expectations, margins contracted, renewing the fear about inflationary forces. Obviously, that surprise wasn’t welcomed by the markets, which in response heavily sold off these names: Walmart adropped by 11%, the biggest daily drop since the session before the Black Monday in 1987, and continued to fall in the days after; Target, another pandemic retail star, lost 25% of its market value in just one session.
While these may seem overreactions at a first glance, they reveal a bigger problem in both the economy and in its short-term future. Indeed, the country’s largest retailer by revenue, Walmart, although it increased its sales in the most recent quarter, had profits eaten by higher product, supply-chain and employee costs. Historically, inflation has benefited retail stores, as elevated prices boosted the nominal value of sales and prices could easily be raised due to their elasticity. This time, though, these companies are finding it harder to fight the inflationary forces.
According to the latest data on American retail spending, in April it increased for the fourth consecutive month as inflation held close to its highest level in four decades. This result was in line with economists’ expectations. Although inflation played a big role into delivering these numbers, even outside of inflation customers seem still willing and, most importantly, able to spend. Consumer spending is by far the biggest contributor to the United States economy, and it may fall in the coming months due to the end of federal stimulus, rising interest rates and declining savings.
However, Walmart management said that higher food costs prompted shoppers to shift their spending away from general merchandise, lowering profits. Furthermore, they pointed out how, despite some people still making big-ticket purchases, sales of store-brand goods are rising, a sign that shoppers are trying to save money, which is the opposite of consumer spending strength. Walmart’s results are generally similar to Amazon, which saw negative e-commerce margins due to overstaffing, warehouse overcapacity, and higher fuel costs that forced the e-commerce to add a 5% fuel surcharge for the first time in the company’s history. On the other hand, Target has a bigger mix of discretionary items, meaning things that are not essential, which tend to have larger margins than staples but, at the same time, are also the first things that consumers cut back on when money starts to be tight. For that reason, Target cannot really be compared to Walmart, but it is still worth looking at as its quarterly results are suggesting to us that the consumer spending is not, indeed, that strong. Target saw particular weakness in television and furniture and although one could say that money is being spent out elsewhere, we are not that optimistic.
To keep pace with price increases, consumers are loading up on their credit cards, according to Federal Reserve data. Borrowing in March soared by the most on record, and a separate report from the New York Fed showed Americans opened a record 537 million credit card accounts in the first quarter. However, considering that real wages are decreasing, and economic output seems to be decreasing too, this condition is hardly a positive note. Not only are consumers spending money they don’t have, but they are also getting less for it. This isn’t sustainable.
Households are finding it every day more difficult to keep up with fuel, bills and food prices: that is pretty common when real wages are decreasing. However, in the very moment in which corporate margins start to decline, the first thing done to reduce costs are layoffs, which would lower even more the median real wage of the population. Usually, that happens during recessions. Considering that to be in a recession, technically speaking, two consecutive months of negative GDP growth are sufficient, and the United States already had the first, how long till economists start saying that consumer spending isn’t actually that strong?
