Back to school
School spending slows while inflation rises.
Bottom line
Consumers appear to be tightening their belts and purse strings during the important Back-to-School (BTS) retail sales season. It’s hardly surprising considering rising energy prices, high interest rates and declining savings. The ingredients of stubborn inflation, rising unemployment and declining confidence could be brewing a toxic economic cocktail.
BTS spending slows Retail sales in August were better than expected, rising a strong 0.6% month-over-month (m/m), compared to consensus expectations for a muted gain of 0.1%. But the gains of the prior two months were revised down: from 0.7% to 0.5% in July and from 0.3% to 0.2%.
August’s strength was largely due to a sharp increase in energy prices. Gasoline station sales soared 5.2% m/m in August. The culprit of course is the increase in crude oil prices (West Texas Intermediate, or WTI), which have surged 42% over the past four months to a 10-month high of more than $90 per barrel. That’s driven up pump prices by 25% since December 2022—nearly reaching $3.90 per gallon.
On the other side of the ledger, online sales were flat in August, down from a strong 1.5% m/m gain in July. But Amazon’s annual Prime Day and similar promotions at Walmart, Target and other retailers goosed July’s increase. In our view, this pulled the internet BTS spending from August into July.
Control results (which exclude spending on food, gas, autos and building materials, and are a direct input into the Commerce Department’s GDP calculations) were better than expected in August. The 0.1% m/m gain was marginally above consensus expectations for a decline of 0.1%. But Commerce revised July control results down from 1.0% to 0.7% and June from 0.5% to 0.3%.
Christmas correlation So with June, July and August spending now in the books, BTS spending for the entire season was revised down from a gain of 2.4% year-over-year (y/y) through July to 2.1% through August. That compares with a strong 9.8% y/y gain in 2022. We saw a similar trend during the Easter “Mapril” season, with March and April sales up a combined 1.7% y/y in 2023 versus a much stronger 8.6% gain in 2022. These three important retail sales seasons of Mapril, BTS and Christmas share a 73% positive correlation over the past 30 years—and personal consumption accounts for 70% of GDP.
Why is Back-to-School a four-month retail sales season? School spending begins in June, so that college students and parents won’t find themselves out of stock on electronics, apparel and dorm-room furnishings. However, many parents and students retain some of their apparel budget until September to scope out fashions and take advantage of Labor Day sales.
Inflation remains stubbornly high There’s little question the inflation picture has improved over the past year. The Consumer Price Index (CPI) surged from 1.4% y/y in January 2021 to a 41-year peak of 9.1% in June 2022. But it declined to 3.2% in July. CPI leapt back to a 3.7% gain in August, but that was due in part to a surge in energy and food prices, rising wages and shelter costs. Core CPI, which strips out energy and food costs, spiked to a 40-year high of 6.5% y/y in March 2022 but declined to a 4.3% increase last month. The Federal Reserve expects to reach its 2% target for core PCE inflation (at 4.2% in July 2023) by year-end 2025.
Higher for longer We think the Fed will forgo a hike at next week’s policy-setting meeting, but expect a quarter-point bump in November. The latter could be the last in this tightening cycle, setting the upper band of the fed funds rate at 5.75%. But we do not expect cuts before the second half of 2024. Those elevated interest rates likely will pressure business and consumer spending.
Personal savings rate rising The 30-year average personal saving rate is 6.6%. It spiked from a pre-pandemic 8.3% in February 2020 to a record 33.8% in April 2020, due to generous fiscal stimulus benefits of the CARES Act. It decreased to still sky-high 26.3% in March 2021 thanks to the the American Rescue Plan until plunging to a 17-year low of 2.7% in June 2022. Over 2023 it reversed course slightly, hitting 3.5% in July as consumers appear to be concerned about the nascent rise in the unemployment rate from a 53-year low of 3.4% in April 2023 to 3.8% in August.
Excess savings dwindling Excess personal savings, which peaked at $2.3 trillion in September 2021, shrunk to $270 billion in July 2023. At that pace (about $92 billion monthly), we expect that they will be depleted by the end of October.
Student loan payments return The Supreme Court ruled in June that President Biden’s effort to forgive $1.7 trillion in student loan debt was unconstitutional. Some 40 million borrowers will begin to repay an average of $400 per month starting in October. Although this amounts to less than 1% of annual GDP, it may disproportionately impact lower-income borrowers, potentially pressuring their consumption behavior.
Credit card usage and delinquencies rise Against this backdrop, credit card usage increased 13.9% in June 2023 from a year ago while delinquencies soared 2.8% (nearly double the 1.5% rate at the bottom of this cycle in September 2021).
Business and consumer confidence have rolled over from July peaks:
- The University of Michigan Consumer Sentiment Index surged to a 2-year high of 71.6 in July 2023 over the last year from a 44-year low of 50.0 in June 2022. But the index fell to a surprisingly weak 67.7 in September.
- The Conference Board’s Consumer Confidence Index leapt to a 19-month high of 114.0 in July 2023 from a 17-month low of 95.3 in July 2022. But the index plummeted to 106.1 in August.
- The NAHB Housing Market Index of builder confidence soared to a 1-year high of 56 in July 2023, up sharply from a nearly 3-year low of 31 in December 2022. But the index plunged to 50 in August 2023, due to a recent surge in mortgage rates to 8.0% (more than double their 3.5% trough in 2021).
- The National Federation of Independent Business (NFIB) small-business optimism index rebounded to an 8-month high of 91.9 in July 2023, up from a 10-year low of 89.0 in April 2023. But the index declined to 91.3 in August.