Retailers Face an Uncertain Holiday Season as Consumer Spending Slows

Consumers pulled back a bit on their spending increases in August, notching the slowest growth since the beginning of the year. The latest data from the Bureau of Economic Analysis hints that that as job growth remains pressured — and perhaps as “early” back-to-school and travel-related outlays pulled personal spending through the summer — households are poised to take a breather.

All of which may make retailers sweat a bit, as September leads into the holiday shopping season, which can be a “make or break” few months for merchants.

The data indicate that personal spending in the United States was up by 0.2% in August, compared to July. But in July that month-over-month boost was 0.5%, in June it was 0.3% and in May it was 0.5%.

The moderating pace comes as the price index rose by 0.1% in the month of August, which was below expectations and so has cheered Wall Street as investors sent stocks up 0.8%, and a 2.2% annualized pace is slower than has been seen through the spring and summer.

Will the Trends Continue?

Consumers are buying more, at least in terms of quantity (a rough measure which comes by subtracting the price index growth from the consumption growth).

On the upside, the slowdown may mean that consumers are saving some dry powder for the holidays. And as we noted, per the GDP data released this week, the personal saving rate was north of 5%.

In the meantime, the U.S. Census Bureau noted that overall retail inventories were up 0.5%, which is higher than the 0.3% forecast. The implication here is that retailers have been building a stock of goods on the shelves — whether in brick-and-mortar locations or in stock to sell through digital channels. There’s no glut signaled here, but the trend bears watching. Wholesale inventories, which are moving through the channel, were up 0.2%, versus the 0.1% forecast.

Connecting the dots reveals an uncertain (but not necessarily negative) roadmap as to what lies ahead for merchants: Consumers are spending, but at a moderating pace, while inventories have been building, albeit, also, at a moderate pace — we’ll see if fall and holiday discounting may help those goods get “sold through.”

Much depends on what consumers expect to see in terms of inflation and in terms of their near-term prospects — and that may give a bump to retailers’ fortunes, if the latest, final reading from the University of Michigan gives any indication. Friday, the final reading of the Index of Consumer Sentiment revealed a 70.1 reading, which was up from 67.9 in August.

“While sentiment remains below its historical average in part due to frustration over high prices, consumers are fully aware that inflation has continued to slow. Sentiment appears to be building some momentum as consumers’ expectations for the economy brighten,” said Surveys Director Joanne Hsu in remarks that accompanied the release, adding, “At the same time, many consumers continue to report that their expectations hinge on the results of the upcoming election.”

But at the same time, and in what be taken as a “counter-reading” to that sentiment, The Conference Board reported this month that consumer confidence dropped in September, on higher inflation expectations and on mixed spending plans.

For merchants, there’s reason to be hopeful — and reason to be cautious — as we head toward Prime Day, Black Friday and other seismic shopping events.