Consumer Tailwinds Are Not Sustainable, Retail Group Warns

American retailers this year have something in common with the famous groundhog Punxsutawney Phil: they are trying to decide whether spring has arrived and it is safe to emerge from their burrows and go about their business as before – or whether they should duck for cover.

The year 2023 turned out to be a good one for retailers – the feared recession was staved off and consumers opened their pocketbooks.

“Nevertheless, those tailwinds are not necessarily sustainable,” the National Retail Federation  warned in its January 2024 economic review. “2023 was full of inconsistencies and uncertainties and not a smooth one. Consumers kept consuming when we expected they would have done the opposite. There were recession fears, regional bank failures and inflation, and the Fed continued to raise interest rates despite poor consumer confidence.”

The main feature of 2023, according to the NRF, was “the disconnect between consumer spending and weak consumer confidence.” It was a year marked by a low 3.7% unemployment rate, 4.5% wage gains that outpaced 2.6% inflation, and an increase in overall hiring.

Spending over the holiday period held firm and consumer services spending returned to pre-pandemic levels. Money flowing to goods and services in October and November rose 5.2% year-over-year unadjusted for inflation, with good results also expected for December. Core retail sales were up 3.7% for the first 11 months of 2023. Services fueled the 5.4% pace of overall consumer spending in November as well as inflation.

Nevertheless, the NRF cautioned that tighter credit conditions and higher borrowing costs remain a threat in 2024 while reports show the labor market expansion is slowing. “The big question is where rates will settle in the next several years if the Fed hits its target of bringing inflation down to 2%.”

Looking ahead, the NRF noted that consumer spending is high compared to current income and that it will be difficult to maintain its current pace of growth. And while household finances have been healthy, “excess liquidity is shrinking as the savings buffer built during the pandemic has run down.” Household net worth fell $1.3 trillion in 3Q 2023 after surging to a record $152.3 trillion in the second quarter. The decline snapped a three-quarter rise that had likely boosted consumer spending.

In addition, consumers have raised the level of revolving debt back up to pre-Covid levels. And a cooling labor market that could affect employment and wage growth could impact consumer spending decisions.

It’s up to Punxsutawney Phil to decide what’s next.