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Shoppers Spend Without Splurging, Clouding US Recession Call


Many economists and CEOs are convinced the US economy is about to tip into recession, but a shift in how consumers are spending is making it harder to know what will happen next.

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(Bloomberg) — Many economists and CEOs are convinced the US economy is about to tip into recession, but a shift in how consumers are spending is making it harder to know what will happen next.

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With Covid-19 receding from top of mind, shoppers are returning to stores, traveling and going to concerts — and spending less on remodeling and entertaining themselves at home. The changing dynamic is challenging even the biggest retailers. Faltering big-ticket purchases and weak clothing sales forced Walmart Inc. to issue a surprise profit warning on Monday, causing investors to dump retail stocks on Tuesday.

Once-popular pandemic splurges have also been losing their appeal. On the outs: Peloton Interactive Inc.’s pricey exercise bikes; shiny new Weber Inc. grills; and Netflix Inc. subscriptions, which dropped by a million in the company’s just-ended quarter. Rising costs for everything from food to gasoline have caused shoppers to focus on essentials. 

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Still, US consumers aren’t putting their wallets away entirely. Walmart raised its revenue forecast as consumers struggling with soaring inflation channel spending to basic goods. On Tuesday, McDonald’s Corp. posted sales that surpassed investor expectations, while Coca-Cola Co. lifted its outlook. Both got a boost from price increases. 

Partway through the latest US earnings season, corporate results are feeding a public debate about just how much damage the economy has sustained in recent months. Job creation is healthy and unemployment is low, but prices are rising at the fastest rate in four decades, eroding consumers’ buying power. While a report on US gross domestic product due Thursday is expected to show slight growth, some analysts are predicting the second straight quarterly contraction, which would fit one unofficial definition of a recession.

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General Motors Co. Chief Executive Officer Mary Barra said Tuesday that demand for cars remains robust, but she also warned of “concerns about economic conditions” and said the automaker is tightening its belt. 

“There are some indicators that you know, look, create uncertainty in the future,” Barra told analysts on a conference call. “We’ve taken lot of steps already, but we know the steps we’d take if the situation went in a different direction.” 

The Federal Reserve, battling to get inflation under control, is expected to increase the benchmark interest rate by three quarters of a percentage point Wednesday. And concerns are growing that the Fed’s aggressive rate hikes will slow investment, crimp job creation and ultimately tilt the economy into recession.  

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How much further the Fed raises rates in September and beyond could depend in part on whether the unwinding of pandemic-powered buying patterns redirects spending to a different mix of goods and services — or if consumers are forced to pull back across the board.  

Losing Confidence

Walmart’s warning “leaves us increasingly cautious on the state of the US consumer,” Steven Shemesh, an analyst at RBC Capital Markets, said in a note to clients. 

Soaring energy costs are a big factor straining household budgets. Gasoline surged early this summer, and high natural-gas costs have boosted power bills as a hot North American summer prompts people to crank up the air-conditioning. The squeeze has helped erode consumer confidence, which is at the lowest since February 2021, the Conference Board said on Tuesday. 

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Stress from rising energy and food prices has begun to manifest itself in other ways as well, with AT&T Inc. saying last week that more customers were putting off paying their phone bills. 

President Joe Biden has argued that despite rising inflation pressures, the economy overall remains in good shape, pointing to persistent employment gains. In June, US nonfarm payrolls rose by 372,000 jobs, more than forecast. And big companies are still hunting for workers: Defense giant Raytheon Technologies Corp. said it was having trouble filling 5,000 well paid engineering positions.

“We are struggling in that regard,” Raytheon CEO Greg Hayes said on an earnings call. “The labor market is so tight in this country.”

Nevertheless, some cracks have begun to appear in the job market as well. Several big technology companies have said they plan to pause hiring, and others are rethinking hiring sprees that they embarked on during the pandemic. Shopify Inc., a facilitator of online spending, is planning to cut 10% of its workforce, it said on Tuesday. If more companies tap the brakes on job postings or begin to thin their ranks, that could further darken the mood for shoppers.

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Whittling Inventories

Earnings reports later this week from Kraft Heinz Co., Procter & Gamble Co. and Colgate-Palmolive Co. will provide more clues on consumers’ health. Southwest Airlines Co. will also release results, as carriers struggle to take advantage of a surge in demand for flights. Big airlines have been forced to slow expansion plans amid flight disruptions tied in part to labor shortages and air-traffic control issues.

Large retailers including Walmart and Target Corp. won’t report full results until next month. Both companies misjudged the speed and scope of shifts in demand, underscoring the difficulty of anticipating consumer swings as the pandemic abates. 

Target found itself trying to unload a surfeit of kitchen appliances and patio furniture this spring amid signs that eating in and pandemic-era staycations are now passe. The Minneapolis-based retailer cut its outlook last month and outlined costly steps to whittle inventories, presaging Walmart’s move this week. 

Walmart says it’s gaining market share in groceries as more shoppers seek out its low prices. But that creates a financial drag of its own, since food and consumable goods tend to have lower profit margins than general merchandise. And with food inflation in the double digits, there’s less money left over for everything else. 

“The increasing levels of food and fuel inflation are affecting how customers spend,” CEO Doug McMillon said in a statement. “We’re now anticipating more pressure on general merchandise in the back half” of the year. 

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