Consumer Spending Holding Up but Fragile
Consumers were still spending in March, though the pace slowed from months before and concerns that sales gains are shrinking as the year progresses are mounting.
Those were some of the conclusions from reports issued Thursday from Mastercard and the National Retail Federation.
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According to Mastercard SpendingPulse, which measures in-store and online retail sales across all forms of payment, U.S. retail sales excluding automotive rose 4.7 percent year-over-year in March. Mastercard SpendingPulse reflects nominal spending and is not adjusted for inflation.
However, Mastercard also noted that nominal spending growth was down slightly compared to February when sales, year-over-year, rose 6.9 percent.
“There are a number of factors influencing how today’s consumer is shopping including inflation, the labor market, food and gas prices, and the path of interest rates,” said Steve Sadove, senior adviser for Mastercard and former chief executive officer and chairman of Saks Inc. “But they’re still spending. We’re seeing varied growth sector by sector, with purchases largely shifting to necessities and experiences.”
Mastercard gave a breakdown of March sales results, year-over-year, by sector. E-commerce sales were up 13 percent; in-store sales were up 2.8 percent; lodging rose 23.5 percent; restaurants rose 11.6 percent, and sales at groceries advanced 5.6 percent. They were the key drivers for the month’s year-over-year growth.
On the other hand, Mastercard said home improvement, home furniture and furnishings and electronics continued to experience a dip in year-over-year growth “as consumers prioritized experiences and essentials.”
“The year ahead will be a bumpy journey,” Jack Kleinhenz, NRF’s chief economist, wrote in the just-released April issue of NRF’s Monthly Economic Review.
“Consumer confidence, especially with banks, needs to be maintained in order to sustain spending in these uncertain times. The wildcard is what the Fed will do with interest rates in the coming months,” Kleinhenz said.
The NRF has forecast that 2023 retail sales will grow between 4 and 6 percent over 2022 for a total of between $5.13 trillion and $5.23 trillion. That would be slower than last year’s 7 percent growth but still above the pre-pandemic average of 3.6 percent, the NRF indicated. The numbers exclude automobile dealers, gasoline stations and restaurants to focus on core retail.
Kleinhenz said NRF’s 2023 retail forecast was among the most difficult he has ever prepared. “The broad economic environment in the United States today is anything but normal,” Kleinhenz said, noting that unemployment is near historic lows and consumers have excess savings even though interest rates are increasing rapidly and both the banking and financial markets are unsettled. “In all my years of forecasting, it has never been so challenging to put together the pieces of the economic puzzle and connect them to where the economy is heading. And the disruption and uncertainty are likely to persist.”
With the Federal Reserve continuing to increase interest rates to fight inflation, Kleinhenz doesn’t expect a recession but said the forecast assumes gross domestic product growth will slow from nearly 3 percent in the second half of 2022 to 1 percent in 2023. The forecast also assumes the U.S. banking system is “sound and resilient” as stated by the Fed, with no additional incidents like the collapse of Silicon Valley Bank to cloud consumer confidence.
“The five percentage point increase in interest rates imposed by the Fed over the past year is one of the most rapid ever seen and has had an impact on inflation, but hasn’t slowed the economy as much as expected,” Kleinhenz said. Housing, trade and business investment have been affected, but “consumers have had uncanny staying power” supported by continued job and wage growth, a stockpile of savings built up during the pandemic, access to credit, and lower energy costs. Combined January-February retail sales grew 6.6 percent year over year and the economy likely expanded during the first quarter despite higher borrowing costs.
The NRF indicated that “strong labor and economic activity is maintaining upward pressure on inflation, but the numbers are falling. The Personal Consumption Expenditures Index — the Fed’s preferred measure of inflation — was up 5 percent year over year in February but that compared with 5.3 percent in the previous two months and a peak of 7 percent last June.”
Kleinhenz expects inflation will average between 3 and 5 percent during 2023, and that with pandemic lockdowns gone and consumers comfortable venturing outside the home again, “inflation will be higher for services ranging from restaurant meals to airline travel than for retail merchandise. That has already been reflected in the PCE index for services, which increased from 5.6 percent in January to 5.7 percent in February while the PCE index for goods declined from 4.7 percent to 3.6 percent for the same period.”
Inflation is difficult to measure and more difficult to forecast, Kleinhenz said.
“I don’t believe the full effect of tightening has shown up,” he said. “Monetary policy works with long and variable legs, and it’s too early to know the true effect of interest rates on the base of the economy.”
Mastercard SpendingPulse reports on national retail sales across all payment types in select markets around the world. The findings are based on aggregate sales activity in the Mastercard payments network, coupled with survey-based estimates for certain other payment forms, such as cash and check. Insights are preliminary and subject to change.
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