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Consumer Confidence Could Turn Sour as Woes Escalate

With the holiday season just ahead, will consumers continue to shop until they drop?

The widely tracked Consumer Confidence Index report on Tuesday from The Conference Board could provide some hints as to what direction consumer spending is headed for the fall months.

A lesser-followed report from the University of Michigan’s Surveys of Consumers on Friday indicated no change from an earlier preliminary report for August. That survey showed a collapse in consumer sentiment, with the Index for August ending the month at 70.3, down 13.4 percent from July’s 81.2 reading.

“Personal financial prospects continued to worsen due to smaller income gains amid higher inflationary trends,” Richard Curtin, the University’s chief economist for its  Surveys of Consumers, said. “Consumers’ extreme reactions were due to the surging Delta variant, higher inflation, slower wage growth, and smaller declines in unemployment. The extraordinary falloff in sentiment also reflects an emotional response, from dashed hopes that the pandemic would soon end and lives could return to normal.”

Curtin was also quick to note that the August collapse of confidence doesn’t mean that a downturn in the economy is around the corner. He noted a similar event in September 2005 that saw declines due to the devastation from hurricane Katrina, coupled with rising energy prices. The same thing occurred following the terrorist attacks of Sept. 11, 2001, which had an immediate impact on consumers’ expectations and emotions.

“Although economic expectations began to improve by year-end, the emotional impact on spending patterns lasted for a much longer time. That same type of persistent impact on spending patterns is now likely to reoccur,” Curtin said.

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Presuming that to be the case and in the wake of the damage caused by hurricane Ida, consumer spending could potentially slow over the next few months and not revert back to any normalcy until after the important holiday shopping season.

So far, spending has remained solid, helped by stimulus checks and pent-up demand. “The lean inventories are helping to keep a lid on promotions and drive more full-priced selling, which translates into higher gross margins. This has been a positive offset to the supply chain and freight pressures,” Dana Telsey, founder and chief investment officer at Telsey Advisory Group, said.

Retailers that have thus far posted second-quarter results by and large have raised guidance, either for the third quarter, back half of 2021 or for the full Fiscal 2022 year. These include Walmart Inc., Target Corp., Macy’s Inc., Nordstrom Inc., and Burlington Stores. The question remains to be seen whether retailers might have been too optimistic in upping forecasts because first-half results were so strong.

The National Retail Federation, a retail trade industry organization, is holding fast to its updated June projection for annual retail sales in 2021 to increase 10.5 percent to 13.5 percent from an initial projected growth rate of 6.5 percent to 8.2 percent.

But during a conference call to Wall Street analysts following Burlington’s reporting of second-quarter earnings results, CEO Michael O’Sullivan said that it was “possible 2022 will be a very difficult and turbulent year across the retail industry.”

O’Sullivan pointed out that in 2021, every retailer got the benefit of one-time items that drove sales higher. Those items include pent-up demand after a year of staying closer to home because of the pandemic, boosted by stimulus checks that gave people extra bucks to spend. One of the beneficiaries has been fashion retailers as consumers began to head back outdoors to meet with friends and for rescheduled social events, such as weddings.

O’Sullivan said that when retailers anniversary the one-time items in 2022, comparable-store sales could turn negative. Looking ahead, O’Sullivan said there’s a chance consumer demand will fall at a time when current supply chain constraints ease. “You could see an increase in the flow of merchandise into the country, at the very time that comp sales trends turn negative,” he said.

Analysts from credit ratings firm S&P Global believe that the Covid-19 variant Delta may present new stumbling blocks for U.S. retail, restaurants and other consumer sectors, as infection rates continue to rise. While consumers are expected to ramp up e-commerce and curbside pickup, as well as other workarounds that got them through the pandemic lockdown in 2020, the expectation is that they will spend in different categories and at more moderate levels as pent-up demand wanes, according to credit analyst Sarah Wyeth.

And even if the virus can be contained, other risks are growing. Those risks include labor shortages and supply chain bottlenecks persisting into the critical holiday season.