Many economists and CEOs are convinced the US economy is about to tip into recession, but a shift in how consumers are spending is making it harder to know what will happen next.
With Covid-19 receding from top of mind, shoppers are returning to stores, traveling and going to concerts -- and spending less on remodeling and entertaining themselves at home. The changing dynamic is challenging even the biggest retailers. Faltering big-ticket purchases and weak clothing sales forced Walmart Inc. to issue a surprise profit warning on Monday, causing investors to dump retail stocks on Tuesday.
Once-popular pandemic splurges have also been losing their appeal. On the outs: Peloton Interactive Inc.’s pricey exercise bikes; shiny new Weber Inc. grills; and Netflix Inc. subscriptions, which dropped by a million in the company’s just-ended quarter. Rising costs for everything from food to gasoline have caused shoppers to focus on essentials.
Still, US consumers aren’t putting their wallets away entirely. Walmart raised its revenue forecast as consumers struggling with soaring inflation channel spending to basic goods. On Tuesday, McDonald’s Corp. posted sales that surpassed investor expectations, while Coca-Cola Co. lifted its outlook. Both got a boost from price increases.
Partway through the latest US earnings season, corporate results are feeding a public debate about just how much damage the economy has sustained in recent months. Job creation is healthy and unemployment is low, but prices are rising at the fastest rate in four decades, eroding consumers’ buying power. While a report on US gross domestic product due Thursday is expected to show slight growth, some analysts are predicting the second straight quarterly contraction, which would fit one unofficial definition of a recession.
General Motors Co. Chief Executive Officer Mary Barra said Tuesday that demand for cars remains robust, but she also warned of “concerns about economic conditions” and said the automaker is tightening its belt.
“There are some indicators that you know, look, create uncertainty in the future,” Barra told analysts on a conference call. “We’ve taken lot of steps already, but we know the steps we’d take if the situation went in a different direction.”
The Federal Reserve, battling to get inflation under control, is expected to increase the benchmark interest rate by three quarters of a percentage point Wednesday. And concerns are growing that the Fed’s aggressive rate hikes will slow investment, crimp job creation and ultimately tilt the economy into recession.
How much further the Fed raises rates in September and beyond could depend in part on whether the unwinding of pandemic-powered buying patterns redirects spending to a different mix of goods and services -- or if consumers are forced to pull back across the board.
Losing Confidence
Walmart’s warning “leaves us increasingly cautious on the state of the US consumer,” Steven Shemesh, an analyst at RBC Capital Markets, said in a note to clients.
Soaring energy costs are a big factor straining household budgets. Gasoline surged early this summer, and high natural-gas costs have boosted power bills as a hot North American summer prompts people to crank up the air-conditioning. The squeeze has helped erode consumer confidence, which is at the lowest since February 2021, the Conference Board said on Tuesday.