A shopper walks by a clothing store window. Analysts warn that the picture for consumers remains tricky. Dimensions via Getty Images
Daphne Howland|Source: www.retaildive.com, April 2024
In the first three months of the year, a strong job market and wage gains helped buoy consumer spending, but some analysts warn it may not last.
Last month’s retail sales, released April 15 by the U.S. Commerce Department’s Census Bureau, closed out a first quarter that has been much more of a boon for retailers than many observers expected.
The year-over-year increase in March — 5.3% among the sectors covered by Retail Dive — was notable not just for surpassing expectations but also for beating inflation, thereby representing true demand for goods. Moreover, the federal government upgraded its numbers for the prior months as well.
Inflation reached 3.5% in March, slightly above February’s 3.2%. In addition to labor market improvements — the U.S. economy added hundreds of thousands of jobs in February and March — average hourly earnings for private-sector workers grew 4.1% year over year in March and 4.3% in February, UBS analyst Michael Lasser noted.
“The better-than-expected increase in March retail sales, which is on top of the increase in February, demonstrates that consumers are still spending despite higher prices, interest rate increases and the uncertainty of the macroeconomic environment,” Moody’s Ratings Vice President of Corporate Finance Mickey Chadha said by email.
There were other unique factors in March that probably enabled spending, namely Easter (which most often falls in April) and prime time for the traditional flow of tax refunds back into consumer bank accounts. Many analysts noted that Amazon’s first-ever spring sale likely helped give e-commerce its 5.6% boost. Still, Bank of America economists Aditya Bhave and Shruti Mishra called the March report “unequivocally strong.”
“Some of the March gains appear idiosyncratic, but the broad message is one of consumer resilience,” they said in emailed comments, in which they also noted that the “robust gains in March” and revisions for January and February “meaningfully alter the narrative around retail spending, which now looks solid for 1Q.”
What does that mean for the rest of the year?
April won’t have March’s peculiar variables, and, coming four years after the pandemic and amid calmer inflation, may be one of the first “normal” months in quite a while, according to Meghann Martindale, who leads retail market intelligence for commercial real estate services firm Avison Young. The post-Q1 retail sales performance could be a test of what normal looks like, even in an election year, she said by video conference.
“That volatility that I think we’ve seen is going to start to stabilize, and I’ll be most curious to see what happens in April,” she said.
But she and other analysts warn that the picture for consumers remains tricky, so that the coming quarters may not have Q1’s full throttle.
“Looking ahead, we expect that spending trends across categories will be mixed as consumers remain under pressure from various macro factors,” UBS’ Lasser said.
That includes an accumulation of debt that has been helping to prop up retail sales. WalletHub analysts say that consumers are on pace to add as much as $120 billion to outstanding credit card balances this year and, adjusting for inflation, may break the all-time record for credit card debt. Consumer auto and credit card debt at least 30 days past due is up, according to a report from Moody’s Ratings released last week.
Those figures don’t take into account the rising use of buy now, pay later payment plans. Financially fragile consumers are turning to such installment-based payment methods more often than financially stable ones, the Federal Reserve Bank of New York found earlier this year.
More broadly, following Q1, consumer spending will likely slowly moderate “due to lessening optimism about employment prospects and future conditions, still-high costs of living, and elevated borrowing rates,” Moody’s Ratings analysts said. The full effect of all that may not be felt this year, Martindale said.
“Consumers have been in a mindset of spending, and, even with the stimulus during the pandemic and the wage growth, they’re spending at a pace that is exceeding what that wage growth is,” she said. “So they’re pulling money out of other places. My biggest concern is that we’re creating a consumer bubble that’s going to come back and bite us. Maybe we get through holidays this year — but does it come back and bite us in 2025?”
