Consumer Spending Slump Could Continue Beyond Rate Cuts

Consumer spending has come to nearly a halt amid inflation that while cooling is still elevated.

In June, retail sales were stagnant compared to the previous month.  During May, the category only saw a modest 0.3 percent increase from April. Monster gains have been tough to come by in the industry, as of late.

Spence Mehl, partner at RCS Real Estate Advisors, who focuses on clients in the retail sector, said that some struggles are mainly coming from non-luxury players. Macy’s, for example, posted net sales of just $4.8 billion in the first quarter, a 2.7 percent dip year-over-year.

“Discount retailers like Ross, Burlington and TJ Maxx have all been aggressively expanding,” Mehl told GlobeSt.

“The luxury retailers seem to be doing okay right now. We’re definitely seeing more stress and challenges among mid-level retailers, as they’re struggling a bit more and facing tougher conditions. This shows a growing divide between the high-end and more mid-tier segments of the market.

The slowdown in consumer spending can be attributed to high interest rates and elevated levels of inflation.

The consumer price index, which is widely used to track inflation, ticked up by three percent year-over-year in June. While that’s far lower than the 9.1 percent level it topped in 2022, it’s still not where the Federal Reserve would like it. The ideal rate is around two percent.

The issue is the Fed has hiked rates to slow down the rate of inflation. However, making borrowing more expensive has waned consumer demand and negatively impacted retailers.

But now, the Fed is reportedly expected to start cutting rates in September. However, Mehl said “none” when asked about what the immediate consumer effect is if and when the central bank decides to make the move.

“Consumer spending is a lagging indicator, meaning it tends to respond to economic changes with a delay,” he said.

“So, even if interest rates drop, we probably won’t see an immediate boost in consumer spending right away. It takes time for these changes to affect how much people are willing to spend.”

In the short term, Mehl thinks there will be a “couple of big bankruptcies coming up.” In 2024,  fabric and crafts retailer Joann, as well as clothing chain Express filed for Chapter 11 protection.

On a positive note, Mehl said that retailers potentially going out of business “should reduce competition in the marketplace and make new growth and new deals more palatable to the retailer, because the rents will retract.”

Longer-term, Mehl thinks cutting rates down could help and hopes it will help employers create more jobs, hire, and increase demand.