American consumers have not been shy about a return to spending as the threat of coronavirus lessens and more and more of the economy reopens. But the rate of growth could slow in the second half as buying patterns shift from goods, such as apparel, to experiences.
For now, there’s plenty of activity spurred by pent-up demand, upcoming back-to-school (BTS) sales and the migration of many workers heading back to their offices.
“We are seeing clear signs of a strong and resilient economy,” Jack Kleinhenz, National Retail Federation’s chief economist, said last month when the retail trade organization raised projections for annual retail sales in 2021 to grow to between $4.44 trillion to $4.56 trillion. That estimate equates to a sales gain of between 10.5 and 13.5 percent, up from the prior growth forecast in February of between 6.5 percent and 8.2 percent.
Kleinhenz also projected gross domestic product (GDP) for the year to reach 7 percent. That’s an increase from the 4.4 percent to 5 percent forecast earlier this year. IHS Markit has also raised its GDP forecast for this year to 7.4 percent from 6.7 percent and for 2022 to 4.8 percent from 4.7 percent.
S&P Global Market Intelligence said consumer spending is showing signs of acceleration heading into the summer. The credit ratings firm attributes the outflow to both current expectations for an improving job market and consumers believing that the economy will improve over the next 90 days. That positive outlook, in turn, helps to motivate consumers to open up their wallets and spend, S&P said.
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But there’s one caveat from a survey conducted by S&P. The survey found that as consumers are becoming less fearful of the pandemic, they’re starting to face increasing worries over rising inflation. In fact, consumer fears over inflation—attributed to government spending to fight the pandemic—has more than doubled since the first quarter, rising from 18 percent to 43 percent.
“It’s likely that inflation will not have the same negative impact on spending as the pandemic, but it’s important to monitor over the coming months nonetheless,” the credit ratings firm said.
S&P also found that respondents were signaling an uneven return to normal spending. About 71 percent said they would return to in-store shopping immediately or within three months, followed by 62 percent for dine-in restaurants and 60 percent for personal services, such as hair salons. Lagging behind at 31 percent was on-site fitness, followed by 30 percent for air travel, and 25 percent for professional sporting events.
Joel Rampoldt, managing director at global consulting firm AlixPartners, describes the current state of consumer spending as a “tale of two cities.” While some are very cash strapped, the “savings rate is at a very high level for a lot of customers. These consumers are sitting on cash—many have done quite well through the pandemic,” he said.
One concern facing many business is a dearth of workers.
“If you ask almost any senior executive in the consumer space, the producers, wholesalers and retailers, they’re dying for workers. And they’re competing with unemployment benefits for the same workers. The benefits will come to an end, but until then there will be a tight pinch on the supply side,” Rampoldt said. He expects to see wage pressures over the near term as companies raise starting salaries, as well as add sign-on bonuses, to induce people back to work. And a return to normal for the labor market should provide a boost to economic growth.
Late last month, the U.S. Labor Department said job growth jumped in June as employers scrambled to keep up with a recovering economy. Nonfarm payrolls rose by 850,000, significantly above the consensus estimate of 706,000 new jobs. However, the unemployment rate also inched up to 5.9 percent from 5.8 percent.
Also helping consumerism is the federal child care tax credits that began this month. Retail sales should get a boost from the extra dollars as parents shop for BTS, helped by workers needing new threads as they head back to their offices and back out on the town.
Gabriella Santaniello, a retail consultant and founder of the research firm A Line Partners, says her team has been out tracking customer traffic at malls, keeping tabs on where they shop and what they buy.
“What we saw has been staggered reopenings, but we also saw some categories doing really well, like dresses and occasion options. People want to go out and meet their friends, and they’re also having the weddings that had to be put on hold last year because of the pandemic. I also think we’re starting to get to the point where people are spending more on experiences. Coming into June, it was the leanest I’ve ever seen at any of these retailers in terms of clearance sales. Nobody had any clearances—they were running lean and mean. Now we’re starting to see that clearance sales are sort of starting to normalize. And we’re starting to hear demand for home is waning,” she said.
Santaniello believes the fashion cycle in bottoms, particularly in jeans, should provide a boost to BTS sales, as well as garner interest from consumers looking for some newness to add to their closets. She also said destination spots, such as Las Vegas, are starting to see hotel rooms sell out as consumers hit the road again.
“That’s where the money is going. It’s going to be about share of wallet. And I do think that spending for apparel is going to die down,” Santaniello said. “While BTS will be amazing as it benefits from the fashion cycle and wider bottoms, at some point everybody’s going to start spending more on experiences.”
While Walter Loeb, a former retail executive who is now a consultant, believes that the BTS selling period will be “fairly strong,” he doesn’t expect the season to produce major comparable sales gains over last year. And he also doesn’t expect this year’s BTS season to remain a proxy for holiday sales as it has in years past.
“People aren’t necessarily going to want to continue spending a lot of money on clothing, but they will spend on leisure and entertainment and travel,” he said.
The former Wall Street analyst also said there’s another reason to be cautious.
“The stock market is a big question mark. Right now, it’s not blowing up, but it keeps going up and up, and one has to wonder how long will that last. Some already think it’s in bubble territory. I think there could be a 20 percent correction ahead,” Loeb said, adding that a decline could cause people to pull back and rethink their spending as they pause to digest the damage to their portfolios.