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

US retailers are facing their first decline in real-terms revenue since the global financial crisis this holiday season, even as resilient consumer spending poses challenges for officials seeking to bring inflation under control.

Black Friday, the informal start of the best shopping season, falls this week at a turning point for consumer spending, as the highest inflation since the beginning of years eighty erodes the purchasing power of buyers. Most retailers are cautiously optimistic about the coming weeks, however, as pandemic health fears and supply chain shocks have affected spending holidays in 2020 and 2021 decrease.

Retailers should report core sales growth of 4.5 percent year over year this holiday season, according to S&P Global Market Intelligence. But after removing the inflation that led retailers to increase prices to compensate for their own higher costs, this would equate to a real-terms drop of 1.2 percent.

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

Inflation was causing consumers to look for promotional offers much more than usual, noted Stephanie Cegielski, vice president of research at ICSC, a shopping center industry group, but they still intended to to spend. “They will be buying the same as last year, just at higher prices.”

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

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Credit card lending was “really picking up over the last quarter,” said Betsy Graseck, a managing director at Morgan Stanley who covers US large-cap banks, with delinquencies also accelerating with -the fastest pace since the 2008 financial crisis, a trend that typically foreshadows. more losses from loans coming.

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 sensitive.

Walmart raised its outlook, however, while shoe retailer Foot Locker boasted “strong momentum,” leading analysts to conclude that differing inventory positions could determine the winners. and the losers of the season.

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“I think this is going to be a have/have-not 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 anomalous that the normal process of forecasting demand based on the previous year’s performance had “all gone to hell”.

Federal Reserve officials are scrutinizing consumer spending particularly closely as they seek to dampen demand with big interest rate hikes to lower inflation they see as “unacceptably high”.

Line graph of real and nominal annual growth in US retail sales (%) showing that Inflation is the story behind holiday sales growth headlines

Lael Brainard, the vice-president of the Fed, expressed the hope that a reduction in retail margins “could help significantly to reduce inflationary pressures in some consumer goods”.

This week it reiterated its view that larger inventory stocks could trigger “competitive pressure” to reverse the mark-ups that many retailers have imposed while the economy was recovering from the depths of ‘contraction caused by the pandemic, and plagued by supply chain issues.

James Bullard, president of the Fed’s St. Louis branch, told reporters this week that businesses face “a very difficult situation if they make the wrong pricing decision.”

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“[If] try to raise prices too much and too far ahead of everything their rivals are doing, they will lose market share,” he said, adding that such losses tended to be “permanent, and could ‘ it even puts you out of business altogether”.

Retail sales last month rose 8.3 percent higher than expected year over year. After the Fed’s most aggressive efforts in decades to tighten monetary policy, however, higher borrowing costs have begun to bite. “Consumers are going back, they’re changing how they allocate their spending,” Mary Daly, president of the San Francisco Fed, said this week.

“They are dealing with high inflation, of course, so they have to make compromises and put back things they would have otherwise achieved, but they are also preparing for a slower economy. This is a very good start.”

Because policy changes work with a lag, officials at the central bank expect a stronger economic response in due course, suggesting a much less favorable outlook for consumer spending next year, when many economists expect a US recession.

“This Christmas season can’t be as good as last Christmas season,” Bullard said on Thursday. “But from my perspective, a slowdown would be good for the Christmas season.”

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