Retail sales: Disposable income ‘has taken a real hit this year,’ economist says
Manulife Investment Management Global Macro Strategist Eric Theoret and T. Rowe Price Chief U.S. Economist Blerina Uruci join Yahoo Finance Live to discuss U.S. inflation in and around the retail space, retail sales, consumer spending, the expectations for the holiday season, and Target earnings.
Video Transcript
- Let's broaden things down now and take a wider look at where the economy could be headed. We've got those retail sales numbers, not just from the likes of Target, but also for the US economy, consumer data this morning. Maybe the end is near for Fed hawkishness. We shall see. There's recent data showing potential softening in inflation. The big question, can the Fed stick the landing for all of us? Inflation one of the key themes we're seeing in and around the retail space, contributing to rising costs, alongside instability in energy.
Let's take a wider look with our panel. Joining us now, we've got Eric Theoret, who is Manulife Investment Management global macro strategist, and Blerina Uruci, who is T. Rowe Price chief US economist. Thanks for being here, both of you.
Blerina, I want to start with you. As we look at the retail sales numbers this morning, and on the face of it looked pretty good. What is your big-picture view of those numbers?
BLERINA URUCI: So I absolutely agree. This retail sales number were better than expected. And then you look at the detail of it, and it's broadly based strength in those retail sales numbers.
Now, having said that, I would say there are two caveats here. First of all, we need to figure out how much of this is consumers bringing forward spending ahead of the holiday season. So we need to see this strength continued in the November as well as December prints.
The other one is for companies like Target, companies that are in the goods sector, we are in an ongoing shift of consumer spending from goods towards services. And that's going to hurt some sectors and benefit others. So even though in aggregate the macro data might point to continued strength in consumer spending, I think when we look at the distribution by sector, it's going to be challenging for some companies.
- So to her point, if we are seeing consumers bringing forward some of that spending, what would you say the health of the consumer is relative to the beginning of this year, but perhaps even prepandemic, as we've seen a lot of year over two comps or year over three comps at this point come forward from some retail companies, too?
ERIC THEORET: Right, absolutely. I think when we think about the state of the consumer, obviously very strong. And if you bring it back to even the prepandemic, the health of the consumer balance sheet was also very solid. So we have consumers that, obviously, are in a very good financial position. We are starting to see quite a bit of a pickup in borrowing as well. So that lag between tighter policy and lending just hasn't really kind of caught up yet. And we know that monetary policy acts with a lag.
So I think at this point, the consumer is strong. They are spending. And I think some of that is also being amplified by borrowing as well.
- We're starting to see now consumers or households that earn more than $100,000 trade down the likes of a Walmart. Is that the impact of a bad year for the stock market?
BLERINA URUCI: I think that's also the impact of inflation. Real disposable income has taken a big hit this year. So when we look at those retail sales numbers and adjust them for inflation, October was the first month when we did well. When you look at the year-over-year trailing number, that's actually closer to zero for real retail sales. So I think the health of the stock market, how much of a hit consumer balance sheets have been taken for from the repricing in assets, as well as inflation, I think are at play here.
And it also feels like to me, Eric, that this period where we actually saw inflation benefiting companies writ large, that period is coming to a close. There are still examples of that. But if you look at Target as one example and retail sort of more broadly, it feels like investors should brace themselves for declining profit margins.
ERIC THEORET: Absolutely. I think we are in that spot where, again, in the same way that monetary policy has been tightened and we're waiting for that lag, its impact to the economy, we are seeing, obviously, headline inflation and, obviously, top-line growth really benefiting companies. But I think the margins are about to come under pressure. And I that's the key piece that we'll be watching, obviously, into the end of the year, but, of course, through 2023 as well.
- To what extent are you continuing to see the cost of necessities impact consumers more broadly, too? I mean, we're paying high for everything from housing to energy. And at what point does that really exhaust some of the ability for consumers to continue spending on discretionary items, too?
BLERINA URUCI: So I think this is a great question. And the way we think about it in macroeconomic terms is this idea of consumption smoothing. So the way you do it is you wear down your savings buffer, you spend more on credit cards. And all those things we've been seeing in the macroaggregate data.
The savings ratio has been below the historical average since the beginning of the year. Credit card balances are increasing. So I think consumers are using that buffer to pay for necessities because prices have been increasing so much. But then when I look at 2023, this is why I become more pessimistic about the outlook of the consumer as a whole and the US economy because those buffers have been used and are being exhausted because of higher prices.
- Eric, do you expect the a post holiday season consumer spending hangover, so that first quarter of next year?
ERIC THEORET: Yeah, I think that's a key piece that was just brought up as well. And I think, again, that's the biggest headwind that we have heading into next year is, again, the extent to which the consumer can maintain this above-trend spending. And to the extent to which, again, that consumption has been pulled forward, maybe the borrowing will start to come off. Tighter financial conditions are going to start to bite. And we do see the consumer retrench in maybe a bit more of an aggressive way.
- And so from a strategic perspective, do you just stay away from anything associated with consumer discretionary right now?
ERIC THEORET: I think, obviously, from a, I guess, a sector perspective, we've, obviously, seen the outperformance of the more defensive sectors on a year-to-date basis, right? And, of course, discretionary has been a real underperformer year-to-date. So I think we're not yet in a place where you would want to be overweight the consumer discretionary and maybe stay in staples, utilities, health care, all the things that would benefit from this challenging macroeconomic environment that we are in, that we will continue to head into.
- All right, a little somber, but that's all right. Thanks so much, guys. Appreciate it. Blerina Uruci and Eric Theoret of Manulife and T. Rowe Price, appreciate it, you guys.
