The U.S. Consumer Resiliency

By Presidio Wealth Partners on May 24, 2024

April Retail Sales: No Sign of Worry

Last week, market pundits jumped to the conclusion that the U.S. consumer is beginning to crack following April’s retail sales data. The print showed flat growth m/m, below the consensus of 0.4%, spooking investors that the consumer could be starting to slow. We think one month’s worth of data does not show the whole picture – six-month annualized retail sales are running at 3.1%, and 12-months are at 2.8%. Retail sales are up 3% y/y, with a large majority of sectors still seeing growth over that time period.

Chart 1: Retail Sales in April Was Up 3% Y/Y, With Online Shopping Leading the Way[1]

Card Spending Was Up in April, Led by Lower Income Households

Bank of America’s card data for April echoes a similar sentiment: the consumer is remaining resilient, and spending is still strong. Importantly, lower income spending growth remains above higher-income spenders, contradictory to what some headlines state. A popular narrative is that higher savings rates support even greater discretionary spending for higher-income households. This cyclical earning, saving and spending pattern is keeping inflation sticky near 3%. It is also supporting a strong economy.

Bank of America’s Consumer Checkpoint report titled “April Flowers, Not Showers” states that there is no evidence of a recent slowdown in lower-income households (<$50,000) spending. In March and April, lower-income household spending growth outpaced that of higher-income (<$125,000) across most categories. Also, lower-income after-tax wages and salary growth are higher than middle- and higher-income households, up 4% y/y in April. The job market continues to support consumers broadly; there remain more job openings than people unemployed.

Chart 2: Lower Income Spending Growth Remains Highest Among Lower-Income Households[2]

Chart 3: ­­Lower Income After-Tax Income Growth Is at 4% y/y as of April[3]

Retailers Report Strong Consumer Activity in the First Quarter

Many retailers mentioned healthy and active consumer activity in the first quarter of this year. Walmart (WMT) management noted that consumer spending and trends have been “consistent,” and they have seen growth in higher-end consumer spending. WMT revenue was up 6% y/y and global e-commerce sales were up 21% y/y. WMT stands to benefit from high- and low-income consumers that look for value, something that is relevant regardless of economic conditions.

Costco (COST) reported increased traffic of 5.3% worldwide and 4.3% in the U.S. for the previous quarter, with average transaction volumes slightly higher y/y. The company grew its paid members by 7.8% y/y to 73.4 million households, and its e-commerce business continues to grow with sales up 18.4% y/y for the quarter, a further sign of a consumer that is not slowing down spending.

Looking at larger purchases, D.R. Horton (DHI) reported that first-time home buyers represented 57% of closings in the quarter, and net sales were up 14% y/y. Uncertainty around how long mortgage rates will be near 7% has hopeful homebuyers losing patience and willing to take on a higher interest rate. On the earnings call, management mentioned that they expect housing demand to stay elevated due to limited supply at an affordable price. When questioned about possible weakening credit metrics from first-time home buyers, the team stated that they have seen none. There have been no signs of stress, and its buyers maintained an average FICO score of 725 in the quarter. The fluctuation of rates in the quarter had no meaningful impact on its backlog or customer’s ability to qualify for a home.

Delinquency Rates Remain at Historic Lows

Comparing the current environment to history, financial stress is near all-time lows. Mortgage delinquency rates are below 1.5%, and total consumer delinquency rates are near 3%, below the 30-year average of 3.7%. Consumers are enjoying the benefits of a strong labor market, historically low unemployment, a growing economy and +3% wage growth – all while mortgage rates are at 7%. We believe that the economy and consumer are both equipped to continue expanding in 2024.

Chart 4: Delinquency Rates Are Well Below Long-Term Averages[4]

[1] Source: SPGlobal. As of May 16, 2024.

[2] Source: BofA. As of ­May 9, 2024.

[3] Source: BofA. As of ­May 9, 2024.

[4] Source: FactSet. As of May 20, 2024.