More Careful Consumer Spending Shows Up in Corporate Profits

Concerns about possible consumer spending slowdowns have made their way through the markets, into corporate earnings, and into the reality of investor stock-picking. Profit warnings in the luxury, food, and airline sectors have increased concerns about an economic slowdown, as Reuters reported.

The impact of a consumer spending slowdown began to gain attention a few months ago. The BEA’s personal incomes and outlays report for April 2024, released on May 31, 2024, was not pleasing in real terms — that is, after the effects of inflation. Real disposable personal income (DPI) and real personal consumption expenditures (PCE) were down 0.1% in April from March.

Measures improved in May when real DPI grew 0.3% over April, but growth dropped to 0.1% in June. Real PCE was up 0.4% between April and May and then down to 0.2% month-over-month growth in June.

By July, concerns heightened again. Retail sales growth was stagnant. Spence Mehl, a partner at RCS Real Estate Advisors, who focuses on clients in the retail sector, said some struggles are coming mainly for 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.

Reuters noted that investors had to become more careful, finding types of businesses that wouldn’t fall prey to spending normalization. “Consumers have been able to absorb price increases thanks also to the exceptionally high level of savings accumulated (during the pandemic). It seems that now this is coming to an end,” Chiara Robba, head of LDI equity at Generali Asset Management in Paris, told Reuters.

The Financial Times reported that U.S. consumers are tightening their spending belts in travel and leisure. Disney said a “moderation of demand” resulted in a 2% increased revenue from theme parks but a 3% decline in operating profits, the New York Times said.

Meanwhile, Hilton Worldwide president and chief executive Christopher Nassetta said during the company’s latest earnings call that leisure travel has been normalizing. Consumers had increased their bank accounts with pandemic rescue funds. “Coming out of COVID, they’ve spent all that money, they’re now borrowing more,” he said. “And so they have less available — less disposable income and capacity to do anything, including travel.”

Worries spilled beyond those sectors as well. McDonald’s and Proctor & Gamble reported weakening sales, the Financial Times noted.