December 9, 2023

Consumers started the year strong. But their flexibility may be less.

Scott Olson/Getty Images

– Advertisement –

So far, US consumers have continued to spend despite slowing macroeconomic conditions.

But the March retail sales report, which is expected to be published at 8:30 a.m. ET on Friday, shows that strength is waning.

– Advertisement –

Economists are forecasting a 0.3% decline in retail sales in March. This would follow a 0.4% decline in February and a surprising 3.2% rise in January.

“The sequential deceleration in spending after a jump in January poses meaningful risks of negative GDP growth in 2Q,” Bank of America economist Aditya Bhave wrote in a note to clients.

– Advertisement –

Retail sales are generally an important measure of shoppers’ confidence and financial strength. And as recession rumblings heat up again, consumer health is playing an increasingly important role in determining the overall state of the US economy.

“Ironically, based on the ISM Manufacturing Survey of the past five months due to a manufacturing slowdown, the only way for the US economy to grow is if consumer spending remains strong through retail sales,” said Louis Nevelier, chief investment officer at the investment firm Navalier wrote in a recent note.

US consumers have been more resilient than expected in recent months, helping them avoid a recession. For example, fourth quarter earnings were better than expected for many retailers.

Going forward, that strength will be tested. Many companies are expecting buyers to cut back this year, and have issued cautious guidance for FY2023.

Data from Bank of America’s proprietary credit cards showed household card spending declined “precipitously” by 1.5% in March compared with February. Spending for gas, furniture, home improvements and department stores was particularly weak.

See also  The floodgates are open for grandparents to super-size college savings for grandkids

Some analysts pointed to falling gas prices, suggesting that the decline in spending had little to do with the financial health of consumers. But for others, evidence is accumulating that buyers are starting to rein in spending.

For one, March consumer sentiment fell for the first time in four months, according to a University of Michigan consumer survey. The university will release the preliminary result for April Sentiment on Friday at 10 am.

Inflation was still a source of concern for shoppers, according to the survey, even as prices continued to decline from last summer’s highs. Surveyors were also concerned about a slowing economy.

“Our data revealed several signs that consumers increasingly expect a recession ahead,” said Joan Hsu, the university’s director of consumer surveys, at the time.

According to BofA’s Behaviour, lower tax refunds could also contribute to lower spending. Many pandemic-era tax credits have now expired, with refunds down about 11% this year. DA Davidson analyst Michael Baker wrote in a note that historically, tax refund trends and changes in first-quarter retail sales have been strongly correlated, so fewer refunds “will put pressure on” March retail sales.

A slack labor market will also put pressure on consumers. Record low unemployment has helped boost consumer spending over the past two years. It’s slowly coming back, with wages rising and hiring picking up in March, according to the latest jobs report.

“When this jobs report is considered, and potentially the start of more weak demand for workers, it becomes a comprehensive set of economic and corporate data during the month of March that suggests that the economy has entered a period of tangible recession,” wrote Rick Ryder, Blackrock‘S
Chief Investment Officer of Global Fixed Income in an email Baron’s,

Write to Sabrina Escobar at [email protected]

See also  8 things Warren Buffett says investors should do to best weather a recession