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Early Signs Suggest Consumers Are Tapped Out

Are consumers tapped out? Recent data says it’s looking that way.

January’s 3 percent retail sales bump might be as good as it gets for U.S. businesses.

“Our own leading economic indicators suggest that if we are going to have a recession, it’s probably starting right about now—February, March, or even as late as the beginning of the second quarter,” Dana Peterson, The Conference Board’s chief economist, said during a webinar on Thursday. She believes any slowdown that materializes won’t last very long or be as bad as the Great Recession.

That’s partly because of the “very tight” labor market, where the unemployment rate is right around 4.5 percent.

Credit card trends are troubling too. Peterson said people are increasingly paying with plastic and pointed to higher delinquencies as well. “Maybe we’re approaching the point where consumers are kind of tapped out,” she said. If they’re worried about losing their job, they probably won’t feel good about shopping for niceties.

“Negative” spending trends emerged in November, according to Erik Lundh, principal economist for the U.S. at The Conference Board.

“The trend in terms of consumer spending sort of towards the tail end of 2022 hadn’t actually looked very good,” he said.

January’s retail sales numbers might have been just a fluke of relatively mild weather that encouraged shoppers to get out and about. “So we’re going to really have to focus on the consumer, I think over the next month or two, to see if we’re going to need to adjust course in terms of our recession call,” Lundh said.

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Walmart’s fourth quarter earnings showed people spending on food while general merchandise sales, including the toys, home and apparel, categories, suffered.

Wealthier shoppers are behind much of Walmart’s sales, while people are picking private labels over national brands, according to John David Rainey, Walmart’s executive vice president and chief financial officer.

Inflation continues stressing consumers and higher prices spell trouble for the foreseeable future, Rainey said.

Brian Cornell, Target’s chairman and CEO, also acknowledged how “very challenging” retail is right now, with strength in beauty, food and household essentials dinged by “ongoing softness” in discretionary categories, after the retailer reported fourth-quarter earnings Tuesday.

Dollar General’s preliminary fourth-quarter results shared on Thursday came in lower than what the company told investors in December.

Though it gained market share, same-store sales rose 5.7 percent instead of the 6 percent to 7 percent the dollar store projected. And new diluted earnings per share guidance calls for $2.91 to $2.96, instead of $3.15 to $3.30.

For now, there’s nothing to confirm that consumers aren’t spending as much. Dollar General said November and January comps were within expected guidance, though December comps came in lower. Deadly Winter Storm Elliott, which killed at least 100 people and dumped 56 inches of snow on the Buffalo, N.Y. area, dinged sales and damaged inventory.

Dollar store executives believes they’ll see more higher-income customers walking through their doors when times get tough.

In August, Todd Vasos, then CEO of Dollar General, said more consumers started trading down to private brands in the second quarter, while better-off customers also “started shopping with us.”

Dollar Tree CEO Mike Witynski saw similar consumer patterns at Dollar Tree and Family Dollar, citing a “huge shift from cash into credit, which tells us the customer is pressured,” according to his second-quarter earnings call last year.

Some industry sources believe Kohl’s, which seems to be clearing out merchandise right now, had a poor holiday season.

In the off-price sector, Burlington likely has more work to do on its turnaround following “execution mistakes” in the second quarter.

Nordstrom‘s holiday sales underwhelmed thanks to customers getting “more selective with their spending,” CEO Erik Nordstrom said last month. Of interest will be the department store’s off-price Nordstrom Rack operation, given that its had its share of inventory issues last year.

Macy’s Inc. last November touted its inventory management and data science investments when it posted third quarter results. The fourth-quarter report will be the proverbial proof in the pudding as inventory levels and results will show how the department store retailer stacks up against its competitors.