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What Q1’s retail sales say about the consumer in 2024

Retail Sales Surpass Expectations in Q1 2024

Last month’s retail sales, released on April 15 by the U.S. Commerce Department’s Census Bureau, closed out a first quarter that has been much more of a boon for retailers than many observers expected.

Year-over-Year Increase in March

The year-over-year increase in March was notable not just for surpassing expectations but also for beating inflation, thereby representing true demand for goods. Furthermore, the federal government upgraded its numbers for the prior months as well.

Inflation and Labor Market Improvements

Inflation reached 3.5% in March, slightly above February’s 3.2%. In addition to labor market improvements, with the U.S. adding hundreds of thousands of jobs in February and March, average hourly earnings for private-sector workers grew 4.1% year-over-year in March and 4.3% in February, noted UBS analyst Michael Lasser.

Consumer Spending Remains Strong

“The better-than-expected increase in retail sales in March, which adds to the increase in February, demonstrates that consumers continue to spend despite higher prices, rising interest rates, and the uncertainty of the macroeconomic environment,” Moody’s Ratings Vice President of Corporate Finance Mickey Chadha said via email.

Unique Factors Driving March Spending

Other unique factors in March likely enabled spending, namely Easter (which often falls in April) and the prime time for the traditional flow of tax refunds back into consumer bank accounts. Many analysts noted that Amazon’s first-ever spring sale likely helped give e-commerce its 5.6% boost. Still, Bank of America economists Aditya Bhave and Shruti Mishra called the March report “unequivocally strong.”

“Some of the March gains appear idiosyncratic, but the overall message is one of consumer resilience,” they said in emailed comments, noting that the “solid gains in March” and revisions for January and February “significantly alter the narrative around retail spending, which now looks strong for the first quarter.”

Outlook for the Rest of the Year

April won’t have the quirky variables of March, and, four years into the pandemic and amid calmer inflation, it may be one of the first “normal” months in quite some time, according to Meghann Martindale, head of retail market intelligence for commercial real estate services firm Avison Young. Retail sales performance after the first quarter could be a test of what normality looks like, even in an election year, she said via video conference.

“That volatility that I think we’ve seen is going to start to stabilize, and I’ll be very curious to see what happens in April,” she said.

Potential Challenges Ahead

However, she and other analysts warn that the picture for consumers remains complicated, and the coming quarters may not replicate Q1’s full throttle. “Looking ahead, we expect spending trends across categories to be mixed as consumers remain under pressure from various macroeconomic factors,” said UBS’s Lasser.

This includes an accumulation of debt that has been helping to prop up retail sales. WalletHub analysts say that consumers are on pace to add as much as $120 billion to outstanding credit card balances this year and, adjusting for inflation, may break the all-time record for credit card debt. Consumer auto and credit card debt at least 30 days past due is up, according to a report from Moody’s Ratings released last week.

Rising Use of Buy Now, Pay Later Plans

Those figures don’t account for the rising use of buy now, pay later payment plans. Financially fragile consumers are turning to such installment-based payment methods more often than financially stable ones, the Federal Reserve Bank of New York found earlier this year.

Conclusion: Moderation in Consumer Spending

More broadly, following Q1, consumer spending will likely slowly moderate “due to lessening optimism about employment prospects and future conditions, still-high costs of living, and elevated borrowing rates,” Moody’s Ratings analysts said. The full effect of all that may not be felt this year, Martindale said.

“Consumers have been in a mindset of spending, and, even with the stimulus during the pandemic and the wage growth, they’re spending at a pace that is exceeding what that wage growth is,” she said. “So they’re pulling money out of other places. My biggest concern is that we’re creating a consumer bubble that’s going to come back and bite us. Maybe we get through holidays this year — but does it come back and bite us in 2025?”

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