Enguerrand Artaz

US consumer spending running out of steam

What do Target, Home Depot, Dollar Tree, Lowe’s, Dollar General, Foot Locker and Macy’s have in common? These US companies all operate in the mass retail segment, and have all recently downgraded their growth expectations for the year, for turnover in particular. And all have given similar reasons to justify this weaker outlook, citing a clear slowdown in consumer demand, which is likely to remain a brake in the coming months.

There are two factors driving this drop in US households’ appetite for spending. In the first instance, although inflation is slowing, prices continue to rise and are reaching levels that are starting to make too big a dent in household purchasing power, while real wage growth – i.e. wage inflation less CPI growth – remains negative. This is provoking a decline in the volume of purchases and a fall in expenditure, accentuated by the shift to a greater proportion of low-cost products. This phenomenon is confirmed by comments from the retail giant Walmart – one of the few companies in the sector not to downgrade its forecasts, but one which has nonetheless emphasised the change in consumer behaviour.

The second reason for demand running out of steam can be found in the consequences of the Covid crisis. Lockdown, health restrictions and various closures resulted in a sluggish services sector for close to two years, with the knock-on effect of an overconsumption of goods. This trend has clearly reversed in the last few months, with lower footfall at retailers and demand for tourism and leisure activities remaining strong. Seen from this angle, it could be tempting to believe that setbacks for the mass retail segment are not terribly worrying from a macroeconomic perspective, as household spending has merely shifted its focus. The reality is different and not quite so rosy.

In recent quarters, consumer spending has indeed been fuelled by the savings surplus built up during the Covid crisis. This surplus has now declined by at least two thirds overall, and even more sharply for less well-off households. In addition, leading indicators for consumer trends are hardly reassuring – consumer confidence surveys are deteriorating and savings rates are rising again.

The momentum of household spending going forward will be key for the US economy: structurally, because consumption represents over two thirds of US GDP; and economically, as household consumption was the only thing supporting US growth in the first quarter. If US consumer spending really is running out of steam, while the trend in employment is showing the first tenuous signs of reversing, it is hard to see what will stop the US economy tipping into recession in the coming months.


Final version of 2 June 2023 – Enguerrand Artaz, Fund Manager