Have consumers maxed out their spending?
REAL ECONOMY BLOG | May 19, 2023
Authored by RSM US LLP
Ominous economic conditions fueled by debt ceiling uncertainty and sticky inflation are taking a toll on consumer confidence while compelling consumer products companies to build resilience in pursuit of profitability.
The University of Michigan’s Index of Consumer Sentiment in May fell to 57.7 from the April reading of 63.5. However, consumers have remained resilient despite stubborn inflation and significant increases in the federal funds rate throughout the year. April retail sales were generally positive, increasing 0.4%, with a few specific sectors showing some signs of softening.
So, how long can consumers continue this trend if sentiment is eroding?
A blow to purchase power
Consumers have made the most of their credit cards to support spending habits. According to the Quarterly Report on Household Debt and Credit issued by the Federal Reserve Bank of New York, credit card debt rose to $986 billion in Q4 2022 and remained consistent through Q1 2023, surpassing the pre-pandemic high of $927 billion. While consumers have built up significant savings, higher prices have caused many consumers to use both savings and credit for purchases.
Aside from credit, many consumers have come to rely on recurring financial windfalls to bolster their spending; however, one such infusion of cash is not materializing for many consumers this year.
According to the Internal Revenue Service, the total amount of tax refunds issued this calendar year through the week of May 5 was nearly $262.9 billion—7.9% less than the prior year—despite having processed 0.5% more returns than at the same time last year. The average refund amount fell 7.3% year-over-year from $3,025 to $2,803, reducing the disposable income of many who rely on the annual payment. It remains to be seen how the combination of savings and credit will be deployed in future spending.
On the other side of the spending equation, retail inventories have largely normalized since the severe supply chain disruptions brought on by the pandemic. As consumers grapple with economic uncertainty, this is a key time to reinforce strong inventory management to avoid accumulation of excess inventory and the associated carrying costs. Retailers should focus on the shifting buying habits of consumers as the expectation of a longer battle with inflation becomes more engrained in the consumer mentality.
If consumer spending declines more significantly in the coming months, many retailers may find themselves facing weaker profit margins due to increased costs and steeper discounts required to encourage sales in an unpredictable economic environment. Focusing on efficient processes and automated infrastructure to support a lean inventory process will be critical to maintaining profitability.
As consumer liquidity begins to dwindle, middle market businesses in the consumer products industry need adaptable tools coupled with strong data to understand consumer loyalty, enhance the consumer experience and control inventory to ensure profitability.
Read more in our spring 2023 consumer goods industry outlook and retail industry outlook.
Call us at (325) 677-6251 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Thomas Hamill, Karen Galivan and originally appeared on 2023-05-19.
2022 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Condley and Company, LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Condley and Company can assist you, please call (325) 677-6251.