'Discretion' is the new consumer buzzword: Morning Brief
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The headlines and punditry earlier this year trumpeted the resilience of the consumer. But two important events yesterday threw a wrench into that narrative – and highlighted the new buzzword when it comes to the consumer: “discretion.”
In other words, Americans are being more choosy about how they spend their money.
First, Home Depot (HD) came out with an unusually grim outlook, which CEO Ted Decker blamed not only on lower lumber prices and weather effects, but “softer demand for kitchen, flooring and bath.” Decker acknowledged that 2023 will be a “year of moderation.”
Then, retail sales in April rose by half of what economists had predicted, with weakness in autos, gasoline, electronics, furniture and clothing.
The retail sales number – which did beat estimates ex-autos and gas, rising 0.6% – is not inflation adjusted. That’s a key distinction, Greg Daco, chief economist at EY-Parthenon, told Yahoo Finance.
“If you adjust for inflation, you’re looking at a fairly soft picture when it comes to the U.S. economy and the state of consumer spending,” he said. “The goods sector is seeing a significant pullback. The services sector, less of a significant pullback, but much more discretion being applied in an environment of high prices and high interest rates.”
“What you are seeing is a cooling, more strategic decisions being made and increased elasticity,” Daco added. “People are more sensitive to prices. As prices continue to rise, there is more of that demand reaction than there had been in the prior two years.”
Another indication of that demand reaction: While investors gobbled up food stocks following their earnings, the price-over-volume trend that’s been dominating consumable companies’ strategy also illustrates that shoppers are being more particular.
Now the question is how long that choosiness will last, said Michael Lasser, UBS U.S. Hardline & Broadline and Food Retail Analyst, in a conversation following Home Depot’s numbers. “Do we start to see an improvement as we get into June and July, or is this just the new norm: the consumer is fatigued on all the things that he and she have purchased over the last few years.
The bottom line, Lasser said, is that "it’s best to have cautious expectations on consumption of discretionary goods from here.”
Investors don’t have to wait long for more clues. Target’s on tap for today, Walmart tomorrow, and we’ll be zeroing in on their outlooks.
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