Forecasts from Walmart and Home Depot made for a grim day of trading on Tuesday. The mega retailers' predictions of a weakening economy and a dip in consumer spending this year sent markets tumbling as Wall Street seemed to realize that the Federal Reserve's campaign to quell inflation could yet lead to recession.
What's happening: We've written about the remarkable strength of the US consumer quite a bit here at Before the Bell. According to Census Bureau data last week, retail sales in January jumped 3% to a record $697 billion — notching their largest gain since March 2021.
Consumer spending accounts for about 70% of America's gross domestic product, the broadest measure of the US economy, so it's nearly impossible for the economy to enter a recession as long as consumer spending is growing.
American shoppers have almost single-handedly kept the US economy afloat by continuing to shell out cash for purchases despite stubbornly high inflation. JPMorgan Chase, Bank of America, Deutsche Bank and Goldman Sachs all revised their GDP forecasts upward or put off their expectations for a recession on the back of the strong January report.
But investors are holding their breath, anxious about any sign that the US consumer is wavering.
Walmart and Home Depot stoked those fears, with executives from both companies giving cautious guidance for the year ahead, and warning that consumers were spending more on services and less on nonessential goods.
"The consumer is still very pressured," Walmart CFO John Rainey told CNBC. "And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that's why we take a pretty cautious outlook on the rest of the year."
Home Depot, meanwhile, said it expects revenue will be little changed in the year ahead, and earnings per share will be down by a mid-single-digit percentage.
"After a year of defying gravity, the slowing economy and pressures on consumers have finally caught up with Home Depot," said Neil Saunders, managing director of GlobalData. "Our data show that the number of improvement projects done by consumers fell over the prior year as people conserved cash for other activities over the holiday period."
Superstores like Walmart thrived during the pandemic. That strength continued into the first half of 2022 as some shoppers traded down from high-end stores as inflation hit their wallets. Now, they're warning that consumers' budgets may finally be stretched to the max.
More hangups: While American bank accounts are still fairly robust, they're beginning to dwindle.
Consumers added a total of $398 billion in new debt during the fourth quarter of 2022 — the fourth highest build-up for that period in the past 20 years and nearly 4.5 times larger than a year earlier, according to a new WalletHub survey.
The retail sector as a whole faces a more difficult period. Holiday sales were sluggish for many retailers, and the industry is expected to have a weaker 2023.
Bankruptcies are piling up: Party City, Tuesday Morning, mattress manufacturer Serta Simmons and Independent Pet Partners, a pet store retailer, have filed for bankruptcy in recent weeks.
Bed Bath & Beyond, Rite Aid, Joann Fabric and other chains are also on bankruptcy watch, according to credit rating agencies. These companies have struggled for years and are most vulnerable to challenging economic conditions.
What's next: Target and Dollar Tree are expected to report fourth-quarter earnings next week.
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