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America’s Job Market’s on Fire, and That’s Bad for Retail: Week Ahead

No recession yet in the U.S. as the economy added a shocking 528,000 jobs in July.

While employment in the retail trade rose by 22,000, there’s been no “net change since March,” the U.S. Labor Department said. Job gains in general merchandise stores rose 8,000, and retail trade employment is 208,000 higher than where it was in February 2020.

Creating jobs during tough economic times indicates is a good sign. However, the Federal Reserve needs to tamp down on demand for goods so it can pause rate hikes and gradually stabilize prices. Raising interest rates helps it do that. In the long run, an economy that’s not too hot and not too cold—the so-called “Goldilocks” effect— is better for both consumers and businesses. But if the Fed needs to be more aggressive to stamp out the inflation fire, that also means it’ll be harder for it to avoid a recession that ultimately will crimp consumer spending.

The July jobs report “puts further pressure on the Fed to act aggressively in its fight against inflation,” Wells Fargo Securities economists wrote in a research note. They expect a 50 basis point increase in September, although they’re not ruling out 75.

Meanwhile, rising rates means commercial loans will cost more for businesses, which are already seeing rising costs on multiple fronts including raw materials. For smaller retail businesses, this means limited access to credit, which could instigate more bankruptcies. And rising costs translate to higher prices on the sales floor, making consumers think twice before they open their pursestrings.

Jason English, a consumer staples analyst at Goldman Sachs, said if some consumers are getting cautious with spending, it’s “because they feel that things are bad, not because they’re actually experiencing hardship.”

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Mastercard similarly sees encouraging signals in consumer spending.

“Consumers’ purchasing power has been strained by higher prices, particularly for the most fundamental needs-based categories like food and energy,” said Michelle Meyer, U.S. chief economist, Mastercard Economics Institute. “Thus far, nominal spending remains strong as consumers cope with high price inflation. As we continue to look at the strength of the consumer, we will be keenly focused on trends surrounding employment and wage growth.”

Excluding automotive sales, U.S. retail spending in-store and online rose 11.2 percent year-over-year in July, and was up 9.0 percent, excluding automotive and gas sales, according to Mastercard SpendingPulse. E-commerce activity rose 11.7 percent year-over-year, after months of slowing growth.

Even as consumers navigate high inflation as they spend on wants and needs, apparel sales saw a 16.6 percent increase, nearly as much the 16.8 percent spike in grocery sales. Both categories were beaten by the 18.6 percent spike in jewelry sales last month. Spending on home goods has slowed to just a 5 percent increase, reflecting the slowdown in home sales linked to rising interest rates.

“The latest retail trends place an emphasis on consumer choice and passion driven spending—they’re hunting for deals, shopping across channels and ultimately still spending on experiences and goods that make them feel good, Steve Sadove, senior advisor for Mastercard and former CEO and chairman of Saks Inc., said. “As retailers grapple with excess inventory and supply chain constraints, it’s likely that the promotional activity seen in July will continue to be an important strategy for retailers.”