Is Consumer Spending Headed for a Slowdown?
July 29, 2022 |
The C2FO Team
Signs are mixed, but don’t count consumer spending out just yet.
Have consumers finally had enough?
Consumer spending has been one of the most important drivers of economic growth, even as inflation has skyrocketed this year. In the US, despite declining GDP in the second quarter, consumer spending increased by 1% on an annualized basis, though that was less than recent quarters.
But there are more signs consumers are starting to feel the effects of ever-increasing prices. Recent reports suggest that households are both pulling back and changing how they spend.
In the UK, retail consumer spending shrank by 3.9% on a year-over-year basis for the period between May 21 and June 24, according to the Barclays UK Consumer Spend Report.
According to a June survey from McKinsey & Co., about 60% of European respondents are spending more on energy, food and other essentials because of inflation. As a result, more than a third are spending less on discretionary purchases.
Indian retailers said that sales were up 13% in June compared to the same period in 2019, before the global pandemic, but that’s actually bad news because it represents slower growth. For example, May sales were up 24% compared to 2019, the Retailers Association of India reported.
Consumer spending isn’t slowing everywhere, though. China reports that its spending is on a recovery curve, and Canada reported a 2.2% increase in retail spending in May, higher than expected, driven mostly by sales at gas stations and motor vehicle and parts dealers.
In late July, the US Federal Reserve acknowledged that “recent indicators of spending and production have softened” but cited strong job growth as it raised benchmark rates by 75 basis points (bps).
On the one hand, a slowdown in spending might be exactly what the global economy needs. When consumers buy less, it reduces demand and cools inflation. On the other hand, a sharp dropoff in spending could lead to a more painful recession instead of the “easy landing” that central bankers are trying to engineer.
Pent-up demand for experiences, not things
It’s true that consumers are cutting back on discretionary merchandise, but many — especially those with higher incomes — are still opening their wallets for experiences. In the US, spending on services was up 4.1% on an annualized basis in the second quarter.
After two-plus years stuck at home, “people are just ready for a change,” said Chris Atkins, C2FO’s president of capital finance and capital markets.
US travel spending hit $101 billion in May, the highest it’s been since the COVID-19 pandemic began. In June, UK residents spent 337.6% more on travel agents, 218.3% more on airlines and 161.4% more on travel year over year.
More people are returning to movie theaters. In June, UK consumers spent 70.3% more at cinemas than a year prior. North America theaters generated $3.7 billion during the first half of the year, a massive jump compared with the $1.11 billion spent during the same time frame in 2021, though less than the $5.7 billion made in the first half of 2019. (China, which had become the world’s biggest market for movies, has slipped because of lockdowns in some of the country’s largest cities.)
In the US, eating and drinking establishments made $86.1 billion in June, a 1% increase from the prior month and the fifth month in a row of gains. UK consumers spent 5.9% less on restaurants in May but 7.7% more on takeaways and fast food.
A lot of consumers are itching to get out of the house and see something new, even if it means paying more, Atkins said.
Even among household goods, shoppers aren’t going to completely do away with small comforts, which is why sales of brand-name soft drinks and premium ice cream have grown despite price increases.
Trouble ahead for back-to-school season?
A slowdown in consumer spending — if it happens — could hit just as retailers are gearing up for back-to-school and end-of-year holiday shopping. Will a dropoff in spending ruin everything?
After all, several US retailers were caught with excess inventory this summer and were forced to heavily discount those products. To support the back-to-school season, many are expanding their promotions — Target, for example, extended its annual shopping event for teachers by six weeks.
Despite concerns, the National Retail Federation (NRF) doesn’t think consumer spending will collapse in the remaining months of 2022.
“Regardless of the prospect of a downturn or whether it will meet the threshold of a recession, the consumer outlook over the next few months remains favorable, with most U.S. households continuing to have high levels of purchasing power,” Jack Kleinhenz, the NRF’s chief economist, said in a recent report.
“The economy is moving away from extremely strong growth toward moderate growth, but increased income from employment gains, rising wages and more hours worked is expected to support household spending. None of us can see around corners or say with any assurance what the future holds, but policy actions will likely be the deciding factor shaping the economic outlook this year and next.”
A recent study from Deloitte seems to back up this outlook. According to the firm’s 2022 back-to-school shopping survey, US parents are planning to spend 8% more this year, with the overall market expanding 5.8% to $34.4 billion. That’s despite 54% of those parents expecting the economy to worsen over the next six months.
Deloitte also found:
Spending on technology is expected to decline by 8% while spending on traditional goods could climb 14%.
50% of respondents said they’ll choose environmentally friendly products when they can. As a result, those shoppers could end up spending 22% more.
Unlike last year, when more of the spending was frontloaded into July, more purchases will happen in August.
The bottom line
While the world has changed over the past few years, it hasn’t changed in a dramatic way yet, Atkins said. Parents will still take their kids back-to-school shopping. They still want to go see a movie and grab a burger on their night out.
It’s true that there’s a great deal of volatility and uncertainty in the economy right now. Fortunately, C2FO was designed to give businesses greater control. The C2FO platform makes it easy for businesses to access working capital on their terms and improve their cash flow almost instantly.
Until the economy gets back to normal, smart businesses should work to maximize their working capital, so they can adapt to higher prices and unexpected expenses. Some companies have done this by raising prices, but it’s also possible to increase cash on hand by accelerating payment of their receivables through early payment or supply chain finance.