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‘If you're looking at consumer confidence, you don't feel great, but when you look at what the consumer's actually doing, you feel a lot better,’ said Synchrony CEO Brian Doubles on his company’s earnings call on Tuesday.
Synchrony is a consumer finance company, running credit card programmes for retailers, like Amazon and Lowe’s, so it’s got a pretty good view into people’s shopping habits.
And what Doubles is seeing — for one of the first times that he can remember, apparently — is that mood has decoupled from behaviour, as US consumers continue to spend money despite losing confidence in the economy.
Most likely, this is because people are using sentiment surveys to express their frustration at rapid inflation, even though wages are, for now at least, not falling too far behind. So, you can take with a pinch of salt the results of polls, like the one published by consultancy Simon-Kucher in early October, which reported that, on average, US households will spend 5.5% less on the holidays than they did last year.
A better indicator of people’s financial health is credit and debit card spending data. And last week, Bank of America, Citi, Wells Fargo and JPMorgan Chase all reported year-on-year increases of 8%-13% for the third quarter. None of them flagged rising delinquencies among lower-income groups, either, suggesting there is at least some resilience at all economic levels of society.
But that is the extent of the good news. The less good news is that some of the increases in consumer spending are nominal, meaning people are spending more because prices are higher, not because they are buying more things. And while a crisis does not appear imminent for lower-income households, the pain of rising prices — especially in fuel — is not being felt evenly across society. FMCG brands, in particular, are still reporting that lower-income consumers are ‘challenged’.
Brands that serve affluent consumers, therefore, have more flexibility and room to grow because this segment of society seems happy to absorb price rises and pay for premium products and services. The rest, however, must work hard to win their share of wallet with keen prices and appeals to value or affordable luxury, and they would be wise to get their offers sorted sooner rather than later. Consumer surveys — and a strong Amazon Prime sale — indicate that people are doing their holiday shopping earlier, possibly as a hedge against the threat of further price rises.
Depressingly, this state of affairs probably represents the best-case scenario, too. Consumer spending is resilient for now, but if interest rates stay high, forcing employers to cut jobs, the pinch will come hard and fast.
In the UK, meanwhile, the situation is to some extent reversed. Barclays’ consumer spending report showed that card spending was up 2% year on year in September, while the ONS this week reported that the rate of inflation for the year to September was 3.5%, suggesting a real-terms decline.
Nonetheless, Brits seem more optimistic about their lot. A survey in August by PwC showed that 25% of consumers plan to spend more on Christmas this year, compared with 21% who plan to spend less — the first time since the pandemic that this measure has skewed positive. Other surveys, like the one conducted by GfK, also show consumer confidence in the UK rising, but that the good feeling is confined to people’s personal finances and does not extend to the prospects of the wider economy.
Bain & Company predicts that UK retail sales value will increase 3.5% in November and December, with more than half of that rise due to inflation. But even this may be an optimistic read. It seems more likely that holiday spending will be flat in real terms, or even slightly down on last year. There is also some evidence of a K-shaped economy in the UK, so much like in the US, the brands that can create offerings to cater to both or position themselves as an affordable treat will likely perform better. And those that are able to should move quickly to capitalise on the improved consumer sentiment while it lasts.
Before next Wednesday’s Budget, ideally.
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