On the heels of the Census Department’s depressing March retail sales report, with February seasonally-adjusted retail and food service sales revised downward to -0.2% from January and March down another 1%, comes more sobering news from the Bureau of Economic Analysis.

It just released notice that personal consumption expenditures on goods dropped 0.4% in March in chained 2012 dollars adjusted for inflation, following a 0.3% decline in February. These expenditures reflect much of what people buy at retail, including durable goods spending down 0.8% and non-durables off 0.1% from February.

While the bottom hasn’t fallen out in consumers’ inclination to spend, it is slowing, with the PCE price index still at a 4.2% high in March but dropping from 5.7% in November 2022. And the March personal savings rate increased to 5.1%, up from 4% in the fourth quarter, so people are socking away more cash for bad times ahead.

This may be good news to policy experts intent on quashing inflation, but it should send shivers up the spine of the nation’s retailers.

Regarding declining retail sales, Sonia Meskin, an economist at BNY Mellon Investment Management, told the Wall Street Journal, this “is the type of slowing policy makers would want to see.”

And since the advanced first quarter GDP of 1.1% fell short of the Federal Reserve Bank of Atlanta’s 2.5% prediction, maybe another May interest rate hike can be averted since its been successful so far in cooling demand and dialing back inflation.

Consumer Confidence Drops

But it’s got consumers worried. The Conference Board just revealed that the overall consumer confidence index fell 2.7 points from March to April. And its expectations index, based on consumers’ short-term outlook for income, business and labor market conditions, dropped 5.9 points. It now stands at 68.1, well under the 80-point watermark that is associated with a recession within the next year.

“Consumers became more pessimistic about the outlook for both business conditions and labor markets,” said Ataman Ozyildirim, The Conference Board’s senior director, economics. “Compared to last month, fewer households expect business conditions to improve and more expect worsening of conditions in the next six months.” 

And he added, “Overall purchasing plans for homes, autos, appliances, and vacations all pulled back in April, a signal that consumers may be economizing amid growing pessimism.”

Digging Into The Data

Crunching the numbers using its proprietary model and high-frequency data, Morning Consult economist Sofia Baig reported that inflation-adjusted consumer spending took a sharper downturn than the BEA suggested, down a whopping 9.5% in March.

Persistent inflation is crimping Americans’ spending style, leading them to pass purchases by or trade down to less expensive options. “Morning Consult’s measure of price sensitivity, or ‘sticker shock,’ has increased for all income groups over the past year, indicating that consumers are more likely to walk away from a purchase because the price was too high,” she wrote.

A call to the company for more details about the study and its methodology yielded no response by time of posting, but Baig’s credentials are impeccable, including working more than five years for the Federal Reserve Board as a quantitative analyst.

So let’s take the BEA at its word – “The GDP estimate released today is based on source data that are incomplete or subject to further revision by the source agency” – and assume Morning Consult’s data is more up-to-date and includes more granular data than the BEA’s macro-economic measures. 

What screamed the loudest in the Morning Consult report was the news that the highest-earners ($100k+) pulled back most sharply last month, by as much as 13% in spending from February to March.

Middle-income ($50k-$99.9K) and lower-income consumers (under $50k) restrained spending too, but not to the extent of the high-earners. In addition, Baig also reported high-earners experienced the largest drop in financial well-being in the last year.

Retailers Are Overly Dependent On High-Earners

And that presents the potentially most alarming news for retailers up and down the price continuum: They are overly dependent upon high-earners’ spending largesse.

High-earning households above $100,000 accounted for 51% of all consumer spending in 2021, the most recent year available in the Bureau of Labor Statistics Consumer Expenditure Surveys. And their outsized influence grew since 2019, when they accounted for 47.4% of spending.

“If high-income consumers start to pull back, that would definitely have consequences because they spend a disproportionate share in the economy relative to the population,” said economist Ryan Severino, adjunct professor at Columbia and New York Universities. “They probably play a bigger role in spending and the economy than the average person thinks.”

White-Collar Recession

One of the confounding factors in using economic models developed during normal times to predict what will happen in very unnormal times like these is how the job market is measured.

“There is a pronounced labor shortage in the manual, blue collar labor force, so the overall job market looks strong,” he continued. “But white collar segments of the labor market are feeling the impact of job losses. And they are hitting high-paying sectors of the economy, like tech, media and banking.”

Despite anecdotes that laid-off professionals can quickly land a new job, it can still play havoc on employed professionals’ inclination to spend.

“Job cuts in these professions are making the headlines and can impact other people’s perceptions,” he said and added:

“There’s a strong psychological element to economics and how it impacts behaviors. A lot of assumptions in the economic models don’t necessarily hold up in the real world. If affluent consumers start to become concerned and more circumspect in spending, it could impact the economy and their spending on the margins.”

Luxury On the Margins

The luxury market inhabits one of those margins Severino referred to, where the top 20% of high-income and high-net-worth consumers account for about 70% of luxury brand sales.

Chandler Mount of The Affluent Consumer Research Company reports his company research suggests luxury consumers are becoming increasingly price-sensititve due to inflation and higher prices. As a result, they are reducing their spending by trading down to less premium brands or delaying purchases.

“In the short term, the luxury market may experience a slowdown in growth as high-earners adjust their spending habits,” he shared. “However, brands that can successfully navigate this period of increased price sensitivity and effectively communicate their value proposition will be better positioned for success in the long-term.”

Uncertain Future

Whether or not the economy avoids a full-blown recession remains in question, but all signposts indicate consumers are retrenching and getting prepared for the worst, which isn’t a good sign for retailers’ short-term outlooks.

“The past is relevant only to the past and not to what’s going to happen,” Severino cautioned. “While things have been holding up pretty well so far, consumers are starting to get more cautious.

“I don’t think we are on the precipice of doom, but the data certainly suggest things are slowing down, and this shift on the part of high-earning consumers should be an important part of the narrative,” he concluded.