Americans are burning through excess savings accumulated earlier in the coronavirus pandemic, prompting growing concern among companies about the prospects for consumer spending when the economic stimulus ends.
In this fourth-quarter earnings season, some consumer-facing companies have touted the economy’s resilience as wages rise, unemployment remains at a record high and Americans spend on experiences they missed early in the pandemic. Demand for premium vodka, customized Starbucks orders and Disney theme park tickets, executives report.
Others, however, have warned of new caution among shoppers. Low-income customers in particular cut back on purchases from cat litter to mattresses as inflation remains high and while spending money they have saved due to stimulus packages and low spending after Covid-19.
Estimates of the savings vary, but Morgan Stanley analysts calculated last month that US households will spend about 30 percent of the $2.7tn in pandemic “excess savings” by 2022. This cushion has already disappeared for many poor consumers, he said.
“In general, families at the lower end of the income spectrum do not have more savings and if anything they are dipping into savings,” said Gregory Daco, chief economist at EY-Parthenon. There is now a “K-shaped” pattern in consumer spending, he said.
“Rich people are people who still have the ability to spend freely but even so they do it more carefully” because of inflation and high interest rates, he said. “It’s the lowest and middle income spectrum that is constantly struggling in the face of these high prices.”
The split led to a mixed message from executives, even as companies across the sector became more cautious about predicting the outlook for the coming months.
Citing how many Americans are overspending on their savings, Tyson Foods chief executive Donnie King told analysts this week that he expects consumers to be under more pressure this year. Mattel noted that higher-end toys have been affected by “macroeconomic challenges,” with sales of American Girl dolls down 16 percent.
At the same time, Hilton Worldwide chief executive Chris Nassetta highlighted the $1tn-plus of consumer surplus savings still sitting as a boost to the hotel sector.
“They’re spending, and maybe they’re reading newspapers and watching the news and getting more nervous,” he said, but hotel operators are benefiting from a parallel shift in spending from goods to experiences such as travel.
“The confusion in some of these headlines suggests that the economy is moving quickly, depending on the economic sector,” said Michelle Meyer, chief economist for North America at the Mastercard Economic Institute.
“We are in an environment where the economy is the right size and depending on the economic sector it will be different. For some sectors, it will be a good acceleration, but for others, a contraction,” he said.
Mastercard’s SpendingPulse tracker found that U.S. retail sales excluding autos rose 8.8 percent year-on-year in January, but the headline numbers made big differences between sectors. Furniture and furnishings sales fell 1.2 percent even as people’s travel budgets rose and restaurant spending rose 24.2 percent.
With household balance sheets generally “in pretty solid shape”, consumers “have money but are nervous”, Hugh Johnston, PepsiCo’s chief financial officer, told the Financial Times. He avoids big purchases, “but wants affordable treats”, he said.
Some companies are distinguishing between wealthier and poorer customers, with Diageo citing a growing market for premium spirits priced at $50 or more per bottle and Yum Brands highlighting growing interest in cheaper menu items such as Taco Bell’s $2 burritos.
“We see high-end consumers continuing to stay there [but] low-end consumers have been where much damage has been,” Scott Thompson, CEO of mattress maker Tempur Sealy International, told analysts.
Pet owners are trading down from premium for “value” litter, Church & Dwight told investors. “I don’t know if technically we are in a recession or not as judged by economists, but I can tell you that our consumers believe we are in a recession,” said Barry Bruno, chief marketing officer. As inflation pushes up the cost of everyday goods “that forces us to make difficult decisions”.
A University of Michigan survey confirmed on Friday that high prices are still weighing on consumers despite moderate inflation, keeping sentiment 22 percent below the index’s historical average.
Daniel Sullivan, Edgewell’s chief financial officer, said the shaving and sun cream maker had not seen a drop in trading but would not be surprised if prices in the market became more promotional. “We look at the data, especially the increase in credit card usage, and it’s usually a good indicator,” he said.
A more cautious consumer picture has played into the corporate reporting season when earnings averaged just 1.6 percent above expectations, according to Refinitiv I/B/E/S. Over the past 30 years, large listed US companies have beaten forecasts by an average of 4.1 percent, making this “surprise factor” the weakest since the fourth quarter of 2008.