Consumer spending accelerated at a record pace in 2021, aided by a sizeable increase in fiscal support (direct payments, enhanced and expanded unemployment, and deferred consumer debt payments). That support has gone away in 2022, the acceleration in 2021 activity is now a headwind to 2022 growth comparisons, and the acceleration in prices is having an impact on real purchasing power. There were several data points in the last week that confirmed this negative development.
Retail and food services sales for April 2022 increased 0.90% from March 2022, a decline from a 1.4% increase in March compared to February. The year-over-year increase accelerated from 7.3% in March to 8.2% in April. These numbers are reported on a nominal basis. Using the year-over-year consumer price index (CPI) growth rates for March and April, real consumer spending in April was flat (8.2% CPI), an improvement from the -1.2% decline in March (8.5% CPI).
Source: Macrobond.
While the April year-over-year numbers were not as bad as March numbers, much of the growth is still coming from higher commodity prices as gasoline station spending increased 36.9% y/y (down from 38.7% in March) and grocery store spending was up 8.1% y/y (down from 9.3% in March). Pre-pandemic, grocery store spending typically increases 3-4% y/y. Spending, excluding gasoline stations, was up 5.9% y/y, up from 4.8% in March (lower than oil prices in April).
Source: Macrobond.
Away from the commodity area, several of the large components of retail sales are also slowing. Motor vehicle and parts dealers is the largest category and declined by -1.7% y/y in April (a negative acceleration from -1.3% in March).
Source: Macrobond.
Non-store retailers increased 12.7% y/y in April (an improvement from 5.2% in March helped by an easier comparison).
Source: Macrobond.
Food service and drinking establishments (bars and restaurants) slowed to 19.8% y/y in April from 21.9% in March.
Source: Macrobond.
General merchandise sales increased from a decline of -0.82% y/y in March to a 1.2% increase in April, but the month-over-month pace dropped from 2.1% in March to 0.24% in April.
Source: Macrobond.
Several retail companies held earnings calls last week and reported a similar story that consumers are spending less, switching to lower cost items where possible, and that inventory growth is outpacing sales growth (another issue we have been discussing), which is having a negative impact on their margins (along with higher input costs that are becoming harder to pass on). A range of companies experienced negative investor reactions in response to this news, from Wal-Mart, to Target, to Ross Stores (all had stock declines of 20-30% last week).
Source: Koyfin.
The near-term outlook for retail companies could get worse over the coming months as the second quarter earnings in 2022 have the most difficult year-over-year comparison and real consumer spending is likely to continue to slow as costs remain elevated and real incomes are slowing. This will likely create a negative headwind for revenue growth and margins as companies will have a harder time passing on higher input costs and clearing out inventories.
The consumer spending data is moving in the opposite direction of 2021 data as many of the forces that were supportive a year ago are becoming constraints in 2022 and the negative momentum likely continue to build, resulting in a slowing of overall economic growth in the process.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC