After a year-long dip, consumer spending power will be back in 2023


Customers shop at a Walmart in Houston on Aug. 4, 2021.

Brandon Bell | Getty Images

After a year-long dip, household cash flow will begin growing again right after Christmas, and accelerate through the new year, according to new research by analysts at Goldman Sachs.

These gains will reverse a year of negative growth of about $600, or 4.2%, in household discretionary cash flow, according to Goldman’s analysis.

“This year, we’re looking at negative discretionary cash flow for the first time since the 2008-09 financial crisis,” Goldman consumer goods analyst Jason English said on a recent webinar with the press. The biggest driver of the cash flow improvement next year, he said, will be wages.

That’s good news for retail sales after a yearlong struggle to keep up with inflation, and for the economy’s ability to avoid a recession, according to Mark Zandi, chief economist at Moody’s Analytics, which has a similar forecast of improving consumer finances.

“Cash flow got hit during 2022 but it’s coming back, and cash flow is what drives spending,” Zandi said. “Businesses are unlikely to cut jobs because they know their biggest problem is finding workers,” Zandi added.  

The link between consumer cash flow and retail

While much has been made of the consumer resilience during a period of slowing economic growth, the market has punished retail companies, which have declined roughly twice as much as the broader U.S. stock market index this year, measured by the relative performance of the SPDR S&P Retail ETF and S&P 500 Index. This year’s sloppy performance in consumer spending is happening because households have less cash coming in — even though they have more savings — since stimulus payments designed to fight the Covid pandemic ended in 2021.

Retail sales in the U.S. have risen about 10% in the last year, but most of that reflects the surging dollar value of gasoline and other goods sold at this year’s inflated prices, according to recent Commerce Department data. Auto sales have risen just 1.5 percent, far below the pace of inflation. That has helped the pace of inflation-adjusted consumer spending growth slow to about 1.5 percent in the first half of 2022, compared with nearly 12 percent a year earlier.

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The surge in capital goods spending during the brief Covid recession, as consumers snapped up furniture and other home-related goods when they spent more time at home due to the pandemic, contributed to retail’s slump this year because it pulled demand forward, English said.

But the turn is coming, according to Goldman.

The drop in consumer cash flow began as a steep one, but the spread between 2021 and 2022 has been steadily narrowing. In the first quarter, consumers had 10% less discretionary cash available than in the same month a year earlier, which Goldman says will narrow to a 2.7 percent dip this quarter and a 1.2 percent drop for the holiday season.

The cash flow measure Goldman uses adds other sources of cash, like government transfer payments and borrowing, to current income, and subtracts essential expenses like food and fuel, giving a fuller picture of consumers’ likely ability and willingness to spend. 

Next year, the numbers get more positive through the year, Goldman’s estimates show. Consumer cash flow will rise by 2 percent in the first quarter, and rise to 6 percent-plus in the second half of 2023, an overall gain of about $600 billion.

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Meanwhile, the world’s largest retailer Walmart — which had lowered second-quarter profit targets but then reported a beat on August 16, devoted much of its second-quarter earnings call to explaining its investment plans — which chief financial officer John David Rainey said will be one source of the chain’s hopes to boost profitability in the year ahead. 

Walmart has boosted capital spending 50% to $7.5 billion in the first half of its fiscal year, which ends in January. Rival Target, which experienced a 90 percent drop in second quarter earnings, nearly doubled investment, to $2.52 billion from $1.34 billion. Walmart CFO John Rainey cited the buildout of automation and technology throughout its business, and how it will continue to help drive greater efficiency, in a call with analysts after its earnings. He pointed to the company’s augmented-reality Viz Pick technology, which uses workers’ cell phones to speed up restocking of shelves to avoid lost sales.

Before the coming pop in customer income, retailers still have to get through the back to school and holiday shopping seasons, when household income will still be a little lower than it was in 2021 and retailers will still be dealing with excess inventory of home-related goods that they have been marking down and writing off.

“If we’re cleared by the holidays, we’re in much better shape going forward than the market is currently estimating,” English said. 

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