American shoppers have displayed remarkable endurance this year despite elevated gasoline and food costs, yet Goldman Sachs economists caution that this fortitude is about to face a serious test.
Economist Jan Hatzius pointed out in the latest research note that consumer-facing businesses posted steady sales growth in the second quarter, bolstered by a larger-than-expected wave of tax refunds. Median revenues for S&P 500 discretionary sector members climbed 5.9% year over year, while staples sector members saw a 4.9% median increase?actually 3.9%?with the expansion proving broad-based, as same-store sales accelerated across retailers catering to both lower-income and higher-income demographics.
However, the cracks are beginning to show. Hatzius wrote: "We anticipate softer consumption growth going forward. The July retail sales decline reported last Friday was partly due to Amazon Prime Day occurring earlier than usual; after revisions, the sequential trend aligns closely with our view that the robust spring spending was a temporary byproduct of the tax refund surge. With real cash flows now flattening, we expect real consumption growth to ease to a 1%-1.5% annualized pace in the second half."
Household cash buffers are depleting. Notably, US GDP expanded at just a 1.5% annualized rate in Q2, down from 2.1% in Q1, yet consumption accelerated to a 3.2% annualized pace versus a weak 0.5% in the first quarter, making it the primary engine of domestic private demand. Spending on both goods and services contributed, with prescription drugs, motor vehicles, and restaurant dining standing out.
Procter & Gamble Chief Financial Officer Andre Schulten said on Yahoo Finance's "Opening Bid" in late July: "The consumer is overall okay, staying stable." But he noted divergent behavior across income groups: affluent buyers continue to pay up for new P&G innovations, while lower-income consumers living paycheck to paycheck remain cautious when restocking and making purchase decisions.
Looking ahead, Home Depot, Lowe's, Walmart, and Target are set to release quarterly results and guidance this week, which will put Goldman's "second-half slowdown" thesis to the test. Walmart is the most closely watched, with market attention fixed on its Q3 outlook. Deutsche Bank analyst Christina Katay wrote in a Walmart-focused note: "In an environment where consumers are turning more careful and promotional intensity may rise, it becomes harder for companies to generate incremental sales growth."
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