US retailers face first real-terms fall in sales since financial crisis

US retailers are facing their first drop in profits since the global financial crisis this holiday season, as robust consumer spending poses challenges to officials seeking to bring inflation under control.

Black Friday, the informal start of the shopping season, this week marks a turning point in consumer spending, as the highest inflation since the 1980s erodes consumers’ purchasing power. Most retailers are optimistic about the coming weeks, however, as the pandemic health scare and supply shock that affected holiday spending in 2020 and 2021 subsides.

Retailers should report annual headcount growth of 4.5 percent this holiday season, according to S&P Global Market Intelligence. But after stripping out inflation that caused retailers to raise prices to cover their higher costs, that would equate to a real-term fall of 1.2 percent.

“Demand has held up surprisingly given how much prices have risen,” said Michael Zdinak, head of S&P’s US consumer market service. He added, however, that the unique combination of high inflation and historically low unemployment makes consumer plans unusually difficult to predict. “There is no other year like this,” he said.

The increase in prices was leading consumers to seek out sales more than usual, said Stephanie Cegielski, vice president of research at ICSC, an industry group in the shopping center, but they still intend to spend. “They will buy more than last year, at higher prices.”

Many will turn to credit card loans to do so, after draining their savings from pandemic recovery programs. New York Fed economists this week reported that credit card balances jumped 15 percent annually in the third quarter, the largest year-over-year increase in more than 20 years.

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Credit card lending “has increased significantly in the last quarter,” said Betsy Graseck, a Morgan Stanley managing director who covers major U.S. banks, and delinquency has also been growing at the fastest pace since the 2008 financial crisis, a trend that may resemble precedent. more loan losses to come.

Earnings announcements from major chains offered a mixed picture of the outlook this week, with Target warning that spending patterns had changed “dramatically” at the end of the third quarter, with shoppers becoming more price-conscious.

Walmart raised its outlook, however, while Foot Locker, a shoe retailer, boasted of “strong momentum”, leading analysts to conclude that the different positions of the list can determine winners and losers.

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“I think this is going to be the holiday season,” said Mark Cohen, a Columbia Business School professor and former CEO of Sears Canada. But he added that the 2021 holiday was so unusual that the usual process of forecasting demand based on last year’s activity “all went to hell”.

Federal Reserve officials are scrutinizing consumer spending more as they seek to dampen demand by raising interest rates to moderate inflation they see as “unacceptably high”.

A line chart of real and average annual growth in US retail sales (%) showing inflation is the story behind the holiday sales growth headlines.

Lael Brainard, vice-chairman of the Fed, expressed the hope that the reduction of sales limits “could effectively help reduce the pressure of inflation on some consumer goods”.

This week he reiterated his view that large inventory stocks could fuel “competitive pressure” to push back the prices set by many retailers while the economy is reeling from the deep recession caused by the pandemic, and is mired in supply-side issues.

James Bullard, president of the St Louis branch of the Fed, told reporters this week that businesses face “a very bad situation if they get this decision wrong”.

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“[If] they try to raise prices too much and too far ahead of anything their competitors do, they will lose market share,” he said, adding that such losses tend to be “permanent, and can put you out of business entirely”.

Last month’s retail sales rose more than the 8.3 percent expected on a year-over-year basis. After the Fed’s toughest efforts in decades to tighten monetary policy, however, high borrowing costs are starting to bite. “Consumers are coming back, they’re changing the way they spend money,” Mary Daly, president of the San Francisco Fed, said this week.

“They’re dealing with high inflation, yes, so they have to trade and replace what they could have otherwise, but they’re preparing for a slower economy. That is a very good start.”

Because policy changes are working slowly, officials at the central bank expect a strong economic response at the right time, suggesting a dire outlook for consumer spending next year, when most economists expect a US recession.

“This Christmas season may not be as good as last Christmas,” Bullard said Thursday. “But in my opinion, slowing down will be good for Christmas.”

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