The current state of retail is satiated with complexities including elevated rates, high inflation and the slowing labor market all leading to anxious consumers and ultimately lower spending.
Moody’s new State of the Consumer report, which looks at June 2023, lists cooling job growth and eroding excess savings, still-high inflation, elevated borrowing rates and tighter bank lending as risks impacting the current state. However, despite the ongoing turmoil, the authors of the report predict modest growth in U.S. consumer spending.
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“While accumulated excess savings and wage growth are sources of consumer strength, less optimism about employment prospects could weigh on consumer demand in the coming months,” said Claire Li, vice president of credit strategy and research at Moody’s Investors Service. “Consumer and business sentiment readings continue to bounce around low levels.”
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The company’s report notes that while the labor market is supportive for now with the low unemployment rate, there are indications of a lull soon to come with less optimism about employment prospects that could weigh on consumer demand soon. At the same time, consumer savings are eroding and outstanding household debt grew to $17.05 trillion in first quarter 2023, up $148 billion, or 0.9 percent, from fourth quarter 2022.
“Although wealthier households are far less sensitive to rising prices, their sizable exposures to capital market assets make them more susceptible to financial market volatility amid high rates and slow economic growth,” Li said. Notably, Moody’s research shows that household wealth rose to $148.8 trillion in the first quarter of 2023, reflecting equity prices offset falling house prices.
Researchers from Moody’s noted that while in general, the strength of U.S. household balance sheets has shielded consumers’ purchasing power from high inflation and rising debt services, the buffer is rapidly disappearing. “Certain cohorts, particularly renters, lower-income households, and younger borrowers, are feeling financial pressure,” Li continued. The end of student loan forgiveness, in particular, she said, holds a high likelihood of weakening household finances later in 2023.
Looking at exposed areas as U.S. consumer activity slows, Moody’s outlook for global retail and apparel remains stable with growth prospects stabilizing following a sharp contraction, however, consumer durables companies will be vulnerable as discretionary spending slows. Travel and hospitality categories, which saw positive growth during the pandemic recovery, are now likely to see a slowing pace and inflation and financial challenges continue.