One of the biggest questions for investors over the past year has been when Americans will pull back on spending and trigger a recession. In the fourth quarter, that didn’t happen as retailers and brands exceeded expectations.

But their results and forecasts raised a bunch of red flags for the year ahead.

After the highest inflation in a generation, an increasing group of shoppers — including wealthy ones — are bargain hunting. Savings are dwindling. Consumer debt is piling up. The spending splurge after the height of Covid-19 is over.

As a result, several big retailers tried to pump the brakes during earnings season by issuing sales guidance for this year that disappointed Wall Street. Lowe’s Cos., Best Buy Co. and Target Corp. all see the potential for revenue to decline this year.

“There is a sense among retailers that the consumer has been defying gravity for quite some time, and they are expecting the music to stop,” Neil Saunders, managing director at GlobalData Plc, said in an email. But “no one really knows when this will happen or the extent to which it will occur.”

Shoppers are already shifting purchases to cheaper options, a trend that often coincides with a recession. Walmart Inc. highlighted big gains from families with incomes above $100,000. Dollar Tree Inc., another discounter, touted a similar benefit.

“The current economic climate is driving more higher-income consumers into value retail,” Dollar Tree Chief Executive Officer Richard Dreiling said during an earnings call. They are “trading down.”

The savings rate has dropped below 5% for the first time since 2009, when the economy was in recession following the financial crisis. Meanwhile, inflation remains stubbornly high and wage gains aren’t making up for that.

Rising prices not only make paychecks seem smaller, but they’ve also papered over the fact that a lot of the sales growth in the consumer sector has been from inflation, not shoppers buying more stuff.

Home Depot Inc. has been one of the biggest beneficiaries of the pandemic because increased time at home led Americans to spend more on sprucing up their houses. It has boosted revenue by $47 billion, a 43% gain, since Covid-19 hit the US in early 2020.

But in the fourth quarter, which ran through January, the chain’s sales gained just 0.3% — its worst quarterly performance when excluding the initial hit from the pandemic in almost a decade. That came as transactions fell by 24 million, or 6%. Its results were saved by inflation as the average purchase rose by 5.8%.

Home Depot CEO Ted Decker explained during its earnings call that the company had come into last year expecting that rising prices would reduce purchases by roughly the same percentage. But its customers proved to be more resilient in their willingness to pay more — until now.

“What we are seeing now is some more sensitivity,” Decker told analysts. In the fourth quarter, there was almost “an exact one-for-one offset.” The company expects that trend to continue this year, he said.

In consumer staples, charging more for goods has also been driving sales growth. In Procter & Gamble Co.’s most recent quarter, volume fell 6% — double the rate of the previous three months. But charging 10% more boosted organic sales. Like Home Depot, the maker of Tide has been pleasantly surprised by how willing consumers have been to pay more.

The reaction to price increases has been “much more benign than we would’ve expected,” P&G Chief Financial Officer Andre Schulten said in a recent interview.

But this won’t last, according to Rod Little, CEO of Edgewell Personal Care Co., a P&G competitor that owns brands such as Schick.

“The consumer’s ability to withstand another round of price escalation is going to be challenged,” he said.

In response, some consumer brands are increasing advertising spending in an attempt to boost demand. Retailers have already dramatically pulled back on ordering.

“The pullback that we’ve seen from wholesale customers in terms of their orders has far exceeded any pullback in consumer demand,” Steven Madden Ltd. CEO Ed Rosenfeld recently said.

One benefit to shoppers last year was that several parts of the consumer sector, especially apparel and home goods, had a glut of inventory because they misread demand and there was a lot of discounting. But those days are gone and inflation persists, according to Jessica Ramirez, senior research analyst at Jane Hali & Associates.

At Macy’s Inc., results in the fourth quarter exceeded analysts’ estimates, but the company also raised concerns about the health of the US consumer.

“Credit-card balances continue to rise,” Macy’s CEO Jeff Gennette said in an interview. “You’re starting to see some elements of bad debt creep up.”

While spending on gift-giving and occasion-based products is expected to remain strong, “this consumer is under pressure,” Gennette said.

Despite cracks forming in consumer spending, the unemployment rate is the lowest in half a century. And while the Federal Reserve’s push to curb inflation could weaken the labor market this year, economists don’t see the rate rising above 5% — still a healthy level by historical standards.

“We’re always looking at employment levels, as well as wage levels; both of those things remain very strong,” Abercrombie & Fitch Co. Chief Financial Officer Scott Lipesky said on a call with analysts. But “we don’t know what the Fed is going to do here in the US and how that’s going to ripple through the economy.”

--With assistance from Daniela Sirtori-Cortina and Janet Freund.

This article was provided by Bloomberg News.