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

US retailers are facing their first real-term fall in revenues since the global financial crisis this holiday season, although as resilient consumer spending a challenge for officials who want to control inflation.

Black Friday, the informal start of the peak shopping season, falls this week at a turning point for consumer spending, as the highest inflation since the early 1980s erodes shoppers’ purchasing power. Most retailers are cautiously optimistic about the coming weeks, as pandemic health fears and supply chain shocks that affected holiday spending in 2020 and 2021 recede.

Retailers should report headline sales growth of 4.5 percent year over year this holiday season, according to S&P Global Market Intelligence. But after stripping out inflation that has caused retailers to raise prices to offset their own higher costs, it will equate to a fall in real terms of 1.2 percent.

“Demand has taken off surprisingly well from how much prices have risen,” said Michael Zdinak, who heads S&P’s US consumer markets service. He added, however, that the extraordinary combination of high inflation and historically low unemployment made consumers’ plans unusually hard to predict. “There are no more years like that,” he said.

Inflation leads consumers to seek out promotional offers more than usual, noted Stephanie Cegielski, vice-president of research at ICSC, a shopping center industry group, but they still intend to spend. “They will buy as much as last year, just at a higher price.”

Many will take out credit cards to do so, after the pandemic has depleted their savings from stimulus programs. New York Fed economists this week reported that credit card balances have jumped by 15 percent a year in the third quarter, their steepest year-on-year increase in more than 20 years.

Credit card lending has been “really lean in the last quarter”, said Betsy Graseck, managing director of Morgan Stanley who covers major US banks, with delinquencies also accelerating at the fastest pace since the financial crisis of 2008, a trend that would normally be prefigured. More loan losses come.

Earnings announcements from big chains offered a mixed picture of the outlook this week, with Target warning that spending patterns have taken hold “dramatic” change at the end of the third quarter, with shoppers becoming more price sensitive.

Walmart raised his outlookhowever, while Foot Locker, a shoe retailer, boasted of “strong momentum”, leading analysts to conclude that different inventory positions can determine the season’s winners and losers.

“I think this is going to be a have/not holiday season,” said Mark Cohen, 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 “is all going to hell”.

Federal Reserve officials are scrutinizing consumer spending especially closely because they are looking for damp demand and a large interest rate increase to tame inflation they deem “unacceptably high”.

A line chart of real and nominal annual growth in US retail sales (%) shows Inflation is the story behind holiday sales growth headlines.

Lael BrainardThe Fed’s vice-chair has expressed the hope that the reduction in retail margins “can meaningfully help reduce inflationary pressure in some consumer goods”.

This week he reiterated his view that larger inventory stocks could lead to “competitive pressure” to reverse mark-ups that many retailers have imposed as the economy rebounds from the depths of the pandemic-induced contraction, and is saddled with supply chain problems.

James Bullard, president of the St Louis branch of the Fed, told reporters this week that businesses face “an uncertain situation if they get their pricing decisions wrong”.

“[If] they try to raise prices too much and are too far ahead of what their competitors are doing, they will lose market share,” he said, adding that such losses are usually “permanent, and it can even put you out of business” .

Last month’s retail sales higher than expected 8.3 percent year-on-year. After the Fed’s most aggressive effort in decades to tighten monetary policy, however, higher borrowing costs are starting to bite. “Consumers are pulling back, they’re changing how they’re allocating their spending,” Mary Daly, president of the San Francisco Fed, said this week.

“They’re dealing with high inflation, of course, so they have to make trade-offs and put back things that they’re going to get, but they’re also preparing for a slower economy. It’s a very good start.”

Because policy changes work with a lag, officials at the central bank expect a strong economic response in a certain period of time, suggesting a far less buoyant 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, the slowdown will be good for the Christmas season.”

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