Why the Holidays Could Be a ‘Last Hurrah’ for a Stretched U.S. Consumer

Key Takeaways

• A number of retailers—from Ralph Lauren to T.J. Maxx and Marshalls—brightened their year-end forecasts when fall sales were better than expected.
• According to economists, Americans tend to focus more on the sales. This means they avoid big purchases, and accumulate more debt.
• According to economists, lower-income consumers are still under pressure. They say that spending may slow next year.

Retailers are finding that this year will be more profitable than they expected. But several companies say they squeezed a bit more out of drained shoppers—and economists say demand could dry up next year. 

The fall sales were better than anticipated, which encouraged companies such as Gap (GAP), Ralph Lauren(RL), TJX Cos. Beauty (ELF), Home Depot HD) and Walmart WMT have raised their estimates for year-end sales despite signs that consumers are feeling the strain. 

Company leaders reported that shoppers are buying cheaper products, buying in bulk during sales, and delaying big purchases. Economists say that many Americans have been struggling to pay for basic necessities after years of high inflation. Wealthier customers are also holding back on big purchases.

“After the pandemic, people were buying a lot," said Bernie Baumohl, chief global economist at The Economic Outlook Group. "But you reach a saturation point. You’ve got all the flat-screen TVs, [all] the cars you need."

Consumer Spending Grows, Incrementally 

Americans’ feelings about the economy have improved in recent months, but consumer sentiment remains below pre-pandemic levels, according to the University of Michigan’s Consumer Sentiment Index. Economists have been surprised by increases in core retail spending, which rose 0.4% in October, according to Commerce Department data.

Meanwhile, credit delinquency rates remained “elevated” in the third quarter as credit-card balances rose, according to the New York Fed.

Brands have capitalized by catering to a widespread hunt for lower prices. Marshalls and T.J. Maxx, “crush competition on value,” the CEO of their parent company, Ernie Herrman, told analysts last week. Old Navy has made inroads with moderate- and high-earners, Gap CEO Richard Dickson said. And households with six-figure incomes propelled Walmart’s growth, CEO Douglas McMillon said. 

Walmart has slashed prices on thousands of items, as did Target (TGT). But the third quarter was harder on Target, a business built less on kitchen staples, and more on apparel and other discretionary items. Target did more transactions last quarter, but they tended to be for smaller sums, executives said, with customers showing a more “pronounced” response to promotions than a year ago.  

“As we look at shopping behavior and, certainly, behavior we've seen in Q3 and we expect to see going into Q4, we know that consumers are looking for value,” Target CEO Brian Cornell said recently. “We think that's going to continue.”

High-Income Households Pull Back on Big Purchases

Many consumers are searching for ways to save on essentials, said Chedly Louis, vice president of corporate finance at Moody’s Ratings, but those with more money have an easier time taking advantage of savings strategies.

“That low- to mid-income consumer is generally going to the grocery store more often, but basket sizes are smaller,” said Louis. “That mid- to high-income consumer is more willing to shop at a Costco, at a Walmart, and buy in bulk.”

Affluent Americans are still spending relatively freely, said Oren Klachkin, a financial market economist at Nationwide Mutual Insurance Company. But they're reluctant to make major purchases because of high interest rates and uncertainty about how the next president's policies and geopolitical conflicts may shape the economy, he said.  

That has curbed big-ticket sales at several retailers. Target shoppers are passing up TVs in favor of smaller indulgences like candles and vases, according to Executive Vice President Rick Gomez. Major home renovations have slowed, according to Lowe’s and Home Depot, which said transactions above $1,000 fell nearly 7% year-over-year in the last quarter. And demand for furniture is relatively weak, La-Z-Boy (LZB) and Williams-Sonoma (WSM) executives said on recent earnings calls.

The holiday shopping season may turn out to be a "last hurrah," according to Baumohl.

"Consumers are fairly optimistic about the outlook for the economy,” he said. But “come next year, we’re going to see some of that confidence fade in large part because people are going to face the reality of their personal finances."

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