The resilient US consumer is slowing down and analysts are worried they could be 'hitting a breaking point'

The discretionary spending slump that started last year is delivering a new blow to big US retailers, according to a slew of earnings reports this week. Home Depot Inc. cut its annual profit forecast, citing a customer pullback. Target Corp. and Walmart Inc. warned that recent sales were at their strongest in February but weakened in March and again in April.

The reports signal rising anxiety about US shoppers, who are forgoing purchases of furniture, apparel and electronics in order to afford basic goods. That’s stoking fears of a long-term drag on the economy that some analysts see playing out for years. 

“Consumers are hitting a breaking point,” said Carman Allison, vice president of thought leadership in North America at researcher NIQ. “It could be three years before consumer spending power comes back. This could be something we’re going to be struggling with for the next two to three years — that consumers are going to continue to be stretched.” 

Skimping on Grocery

About 90% of consumers are skimping on grocery bills, only buying what’s absolutely needed and ditching goods such as air fresheners and lawn fertilizer, according to NIQ, formerly known as NielsenIQ. In March, 35% of shoppers were only buying essentials, up three percentage points from October, based on an NIQ survey. 

More than half of Americans are switching to cheaper brands, according to an April survey from Attest. And some 90 million US adults are now struggling to pay for their usual home expenses — higher than after the pandemic hit and millions lost their jobs. 

While some are tightening their belts, others are relying on credit cards and loans to make ends meet. Credit-card balances are growing and carry higher financing rates, adding another headwind for spending. 

“We’re not technically in a recession, but from a consumer standpoint it sure feels that way with the inflation they’ve had to deal with and all the threats of looming recession,” said Jim Doucette, global consumer and retail leader at EY-Parthenon. “They’re feeling stress from a personal-finance standpoint, and that’s certainly driving some of the moves you’re seeing.”

To be sure, US retail sales data this week showed consumers have remained steady in the face of adversity. Outlays picked up in half of the categories covered in the report, including at general-merchandise outlets and online stores. 

Still, the government report laid bare cracks under the surface as Americans continued to pull back on discretionary spending. Receipts at electronics and appliance merchants fell by the most this year, while furniture retailers reported lower sales for a third month. Hobby stores saw the biggest decline in sales in more than a year. 

High Bar

Part of big retailers’ challenge is that the pandemic-era spending binge, which was supported by stimulus payments, set a high bar. Home Depot, for example, recorded 43% growth over the last three years and the Atlanta-based company “knew that 2023 was going to be a year of moderation as we digested those gains,” Chief Financial Officer Richard McPhail said in an interview. 

But that still means there’s less demand now for large home-improvement projects, and weaker-than-usual spending on big-ticket purchases such as grills and patio sets that are popular going into summer. At Target, sales of home goods and apparel are declining, so the retailer is trying to showcase food and essential goods. 

Reports next week from electronics chain Best Buy Co. and apparel retailers including Gap Inc. and Kohl’s Corp. will provide further indications of how much consumers cut back on nonessential spending early this year. Costco Wholesale Corp. and Dollar Tree Inc., also scheduled to report results, will reveal more about spending on basic goods at both ends of the income spectrum. 

Bargain Hunting

With high rates of inflation, shoppers are on the hunt for deals. At TJX Cos., the parent of discount apparel chains T.J. Maxx and Marshalls, average sales per customer were down in the first quarter, but overall store traffic rose. That suggests the company is adding new customers who are looking for lower-priced products. 

Walmart, meanwhile, noted that demand from wealthier households was showing up in apparel and grocery, a sign that some shoppers are trading down. That helped it achieve robust sales growth, despite the expiration of a temporary boost in food-stamp benefits that hurt lower-income customers. 

While US comparable sales beat expectations in the February-through-April period, Walmart CFO John David Rainey said the retailer is taking a cautious view on the health of its customers.

“We’re performing really well right now, our value proposition is resonating,” he said in an interview. “But there’s a lot of the year left to go.”