Why the holidays could be a “last hurrah” for a stressed-out U.S. consumer

The year is likely to be more fruitful than many retailers expected. But several companies say they were able to get a little more out of exhausted customers – and economists predict demand could weaken next year.

Sales were stronger than expected this fall, encouraging companies like Gap (GAP), Ralph Lauren (RL), TJX Cos. (TJX), Elf Beauty (ELF), Home Depot (HD) and Walmart (WMT) to increase their annual sales. Final forecasts, even as executives highlighted signs of consumer distress.

Shoppers are opting for cheaper brands, stocking up during sales and holding off on expensive purchases, company executives said. Many Americans are working hard to cover basic costs after years of stubborn inflation, while wealthier consumers are holding off on big purchases, economists say.

“After the pandemic, people bought a lot,” said Bernie Baumohl, chief global economist at The Economic Outlook Group. “But you reach a saturation point.” You have all the flat-screen TVs and (all) the cars you need.

Consumer spending is gradually increasing

Americans’ sentiment toward the economy has improved in recent months, but consumer sentiment remains below pre-pandemic levels, according to the University of Michigan Consumer Sentiment Index. Economists were surprised by the rise in core retail spending, which rose 0.4% in October, according to Commerce Department data.

Meanwhile, loan default rates remained “elevated” in the third quarter as credit card balances rose, the New York Fed said.

Brands have benefited by tapping into the widespread hunt for lower prices. Marshalls and TJ Maxx are “crushing competition on value,” their parent company’s CEO Ernie Herrman told analysts last week. Old Navy has caught on with middle and high earners, said Gap CEO Richard Dickson. And households with six-figure incomes are driving Walmart’s growth, said CEO Douglas McMillon.

Walmart has cut prices on thousands of items, as has Target (TGT). But the third quarter was tougher for Target, a company that relies less on kitchen staples and more on clothing and other necessities. Target completed more transactions last quarter, but tended to be smaller amounts, executives said, with customers showing a “more pronounced” response to promotions than a year ago.

“When we look at shopping behavior, and particularly the behavior that we saw in the third quarter and that we expect to see in the fourth quarter, we know that consumers are looking for value,” Target CEO Brian Cornell said recently. “We believe this will continue.”

High-income households are retreating from large purchases

“Many consumers are looking for ways to save on essentials,” said Chedly Louis, vice president of corporate finance at Moody’s Ratings, but those with more money have an easier time taking advantage of savings strategies.

“These low- to middle-income consumers generally go to the grocery store more often, but the basket sizes are smaller,” Louis said. “These middle- to high-income consumers are more likely to shop at Costco or Walmart and buy in bulk.”

Wealthy Americans still spend relatively freely, said Oren Klachkin, financial markets economist at Nationwide Mutual Insurance Company. But high interest rates and uncertainty about how the next president’s policies and geopolitical conflicts could affect the economy make them wary of making large purchases, he said.

That has slowed wholesale sales at several retailers. According to Executive Vice President Rick Gomez, targeted shoppers are forgoing televisions and instead purchasing smaller amenities like candles and vases. Major home renovations have slowed, according to Lowe’s and Home Depot. Transactions over $1,000 fell nearly 7% year-over-year last quarter. And demand for furniture is relatively weak, executives at La-Z-Boy (LZB) and Williams-Sonoma (WSM) said in recent earnings releases.

According to Baumohl, the holiday shopping season could be a “last hurray.”

“Consumers are quite optimistic about the outlook for the economy,” he said. But “next year we’ll see some of that confidence evaporate, in large part because people have to face the reality of their personal finances.”