Retailers Cut Prices as Consumers Show Spending Strain

There have been mixed economic signals since the beginning of the year. Investors and markets have gone from expecting four rate cuts this year to Federal Open Market Committee members wondering if there might be no more than one.

Some economists still think that, on the whole, things are improving.

“After the strong monthly readings in the first three months of the year caused progress on reducing inflation to be called into question, there was slightly better news on the headline and core readings of the April Consumer Price Index (CPI), both of which came in at 0.3%,” wrote Pohlad Companies Chief Economist John Beuerlein. “This enabled the headline year-over-year measure to ease to 3.4% from 3.5%, while the core eased to 3.6% from 3.8%. The Fed’s preferred measure of inflation, the core Personal Consumption Expenditure index (PCE), rose by 0.2% in April bringing its year-over-year reading to 2.8%, which was unchanged from March.”

But there is also the question of consumer spending, which is responsible for about 69% of GDP, and jobs, which ultimately limit how much consumers can spend. As the Bureau of Economic Analysis said in its last personal incomes and outlays report, real disposable personal income (DPI) and real personal consumption expenditures (PCE) were down 0.1% in April from March.

“It seems that the cumulative impact of years of inflation is finally catching up with consumers and eroding their savings cushion — something that companies selling discretionary goods from Starbucks to Kohl’s are saying in their public reports,” the Wall Street Journal wrote at the time, citing BMO Capital Markets chief economist Scott Anderson. who noted that April’s savings rate of 3.6% was well below the 12-month average of 5.2%.

For most people in the country, COVID pandemic rescue funds had enabled degrees of savings that helped drive down credit use and reduce poverty, but those funds are either likely used up or close to. Credit card and revolving credit consumer debt is at a historical crest of around $1.05 trillion.

As Beuerlein wrote, “With savings having been drawn down to 3.6% and credit card balances approaching their limits, consumer spending is expected to continue to be less robust than seen in 2023 and thus a drag on GDP.” The impact of financial stress will be on low-income households, “but changes in spending patterns are happening across all income categories.”

There’s also weakening in jobs data.

The implications for the economy could have an effect across CRE property types. The less spending, the less need for facilities leasing across the board, and the less money brought in by retail businesses.