US retailers face first real sales drop since financial crisis

U.S. retailers are facing their first real revenue drop since the global financial crisis this holiday season, even as resilient consumer spending poses challenges for officials seeking to tame inflation.

Black Friday, the informal start of peak shopping season, falls at a turning point for consumer spending this week as the highest inflation since the early 1980s erodes shoppers’ purchasing power. However, most retailers are cautiously optimistic for the coming weeks as pandemic health fears and supply chain shocks that have affected holiday spending in 2020 and 2021 fade.

According to S&P Global Market Intelligence, retailers are expected to see 4.5% year-on-year overall sales growth this holiday season. But after removing the inflation that caused retailers to raise prices to offset their own higher costs, that would equate to a decline in real terms of 1.2%.

“Demand has held up surprisingly well given the price increase,” said Michael Zdinak, who heads S&P’s U.S. consumer markets department. He added, however, that the exceptional combination of high inflation and historically low unemployment made consumer plans exceptionally difficult to predict. “There is no other year like this,” he said.

Inflation was leading consumers to seek out promotional offers far more than usual, noted Stephanie Cegielski, vice president of research at ICSC, a mall industry group, but they still intended to spend. “They will buy as much as last year, but at higher prices.”

[If] they try to raise prices too much and too far from what their rivals are doing, they will lose market share

Many will turn to credit card borrowing to do just that, having exhausted their savings from pandemic stimulus programs. New York Fed economists reported this week that credit card balances jumped 15% a year in the third quarter, their biggest year-over-year increase in more than 20 years.

Credit card borrowing had “really increased in the last quarter,” said Betsy Graseck, Morgan Stanley’s managing director covering large-cap U.S. banks, as delinquencies also accelerated at the fastest rate since the financial crisis. of 2008, a trend that generally portends more loan losses to come.

Earnings announcements from major chains offered a mixed picture of the outlook this week, with Target warning that spending habits changed “drastically” at the end of the third quarter as shoppers became more price-sensitive.

However, Walmart raised its outlook, while Foot Locker, the footwear retailer, boasted “strong momentum”, leading analysts to conclude that different inventory positions could determine winners and the losers of the season.

“I think it’s going to be a holiday season for haves or have-nots,” said Mark Cohen, a professor at Columbia Business School and former CEO of Sears Canada. But he added that the 2021 holidays were so abnormal that the normal process of forecasting demand based on performance from the previous year was “it all went to hell”.

Federal Reserve officials are watching consumer spending closely as they seek to dampen demand with steep interest rate hikes to rein in inflation they say is “unacceptably high”.

Lael Brainard, vice chair of the Fed, expressed hope that a reduction in retail margins “could contribute significantly to reducing inflationary pressures on certain consumer goods”.

This week, she reiterated her view that higher inventory stock could fuel “competitive pressure” to reverse markups imposed by many retailers as the economy rebounds from the depths of the coronavirus-induced contraction. pandemic and struggling with supply chain issues.

James Bullard, chairman of the St Louis branch of the Fed, told reporters this week that companies face a “very risky situation if they get the pricing decision wrong.”

“[If] they try to raise prices too far and too far from what their rivals are doing, they will lose market share,” he said, adding that such a loss tends to be “permanent, and it may even put you completely out of business”. .

Retail sales last month rose more than expected by 8.3% year-on-year. However, after the Fed’s most aggressive efforts in decades to tighten monetary policy, rising borrowing costs have started to take hold. “Consumers are stepping back, they’re changing the way they allocate their spending,” San Francisco Fed President Mary Daly said this week.

“They’re dealing with high inflation, of course, so they have to compromise and hand over things they would otherwise get, but they’re also preparing for a downturn in the economy. This is a very good start.

Given that policy changes work with a lag, central bank officials expect a stronger economic response in due course, suggesting a much less buoyant outlook for consumer spending next year, as many economists expect a US recession.

“This Christmas season can’t be as good as last Christmas season,” Bullard said Thursday. “But from my point of view, a slowdown would be good for the Christmas season.”