Skip to main content

The Days of ‘Excessively Exuberant Consumption’ Are Over

Consumer sentiment and U.S. retail sales could get worse before they get better.

Retail analysts at Goldman Sachs identify risks to consumer spending.

“We will likely remain in a durable goods recession for many quarters to come as we run down excessively exuberant consumption during Covid—a dynamic that we expect will continue to fuel disappointing results and headlines from select digital and physical retailers,” the retail team wrote in a research note published Monday. “Looking forward, we brace for a turbulent back-to-school and holiday shopping season.”

They see potential for “meaningful downside” to consensus estimates through June next year.

Still, things could get better in 2023 should employment income growth continue, they said.

The recent stock market correction poses a risk that net worth will correct as well. While the low-income consumer is already facing pressures from rising inflation, people earning more could see some pressures too largely in the form of their higher tax bracket.

Consumer finances are still in decent shape despite inflation. April saw 11.4 million unfilled jobs against just 4.7 million seeking employment, numbers that suggest people can land better wages and incomes. But consumers who have been tapping into their savings might not continue doing so if they’re not feeling confident about the economy, which could threaten apparel’s momentum fueled by the return of shopping for going-out occasions.

Private brands saw share gains pre-Covid, but suffered in the wake of pandemic supply-chain disruption. And government stimulus checks gave some lower-income consumers room to trade up. But now any potential decline in retail sales will likely be most pronounced among the lowest-income shoppers who might have no choice to purchase wallet-friendly private brands. While this shift benefits private label, national branded could see their pricing power suffer, analysts said.

For now, the industry has bloated apparel and durable goods inventories. Retailers plan to promote or discount in order to clear excess stork. With real disposable income now in the red, discounting benefits consumers by helping to mitigate inflation. The hit to margins won’t be good for retail, however.

Related Stories

In addition, the real personal consumption expenditures price index (PCE) seems to be cooling off. E-commerce could see sales suffer thanks to a weakening durable goods outlook, analysts said.

S&P Global Markets Intelligence’s report this month indicated that internet and direct marketing retail had the indicator for the odds of default within one year of any sector, at 8.1 percent as of July 13 versus 4.5 percent for all publicly traded retailers. Home furnishing retail came in at 6.8 percent, followed by department stores at 5.2 percent, specialty stores at 4.9 percent, apparel retail at 4.4 percent, and apparel, accessories and luxury goods were at 4.0 percent. Home furnishings firms’ risk is 3.2 percent, with footwear companies at 1.7 percent.

Cowen & Co.’s John Kernan write in a research note last month that the health of the low-income consumer had deteriorated heading into the summer months and back-to-school season. And given the inventory missteps that drove Target to cancel some orders, the analysts believes some retailers are far too optimistic about their guidance for second half sales and gross margins.

While inflation looms in the retail backdrop, driving a 9.1 percent increase in consumer prices, the latest National Retail Federation study expects shoppers to match last year’s record high $37 billion spend on products for school-age pupils, with the back-to-college spending coming in at $3 billion above 2021’s $71 billion haul.

An NRF webinar on back-to-school spending Tuesday noted that consumers plan to cut back on dining out (60 percent), while more than one-third are reducing their travel spend so they can afford purchases for school. Consumers also said they’ve dipped into savings and have gone into debt in order to buy what their kids need for classroom study. And while middle and higher income earners had savings to power some of their spending, it was the lower income households that relied on debt to finance purchases. In addition, 68 percent of those surveyed in a recent NRF study on back-to-school and back-to-college purchases say they’ve noticed higher prices for apparel and shoes. And while consumers were worried about supply chain issues and stockouts, retailers had accounted for possible delays by bringing in inventory earlier, NRF said.