The Census Bureau reported June retail sales up +3.8% year-over-year, excluding auto and gas (our preview said +3.7%). There was also a positive inflection in Home Improvement (-0.9% from -4.3%), Electronics & Appliances (+2.7% from +1.5%), Department Stores & Off-Price (+1.7% from -1.5%), and Non-Store E-Commerce (+8.9% from +7.5%). Food Service & Drinking Places slowed by -60 basis points to +4.4%, which was countered by a slight increase in Grocery Stores (+20 basis points to +1.7%) as households are shifting to in-home as a way to cut costs. (Note, these are seasonally adjusted numbers and the month had five weekends versus four, which creates distortions for several categories, which the adjusted figures try to correct for.) All of these dynamics/inflections were evident in Placer foot traffic data, which we covered in the preview. Separately, the Bureau’s May figures were meaningfully increased for Furniture & Home (from -6.8% to -4.0%) and Clothing & Accessories (from +2.4% to +4.3%); the overall May figure was upped +40 basis points to +2.7%. May also shows “less bad” on Furniture; that and the bounce in Home Improvement likely reflects some macro healing in the category, and if interest rates drop, which we believe is soon, home-related goods and retail should have a better second half (which is what we’ve been calling for).
Other nuances in consumer spending were revealed in this week’s earnings results of Synchrony Financial and Discovery (which cater to the less affluent) and American Express (which caters to the affluent). Moreover, these low-end versus high-end spending trends also line-up with Citigroup commentary for its results last week. Synchrony and Discover’s results demonstrate that the lower-end consumer is further curtailing spending, which is a clear negative to the dollar stores (recall that one of our major 2024 themes is that the year will be difficult for necessities-based retail). Discovery’s results were similar to Synchrony, but given their pending merger with Capital One, they didn’t have much to say and so we’ll focus on Synchrony.
Synchrony (our last story here) showed a large drop in new accounts (which reflects them exercising tighter credit standards), lower purchase volume per account, higher average balances (slower repayment), higher charge offs, and higher loss provisions. Purchase volume was also below management expectations, with softer consumer demand cited (which partially reflects the pressure on spending as households have to spend more on insurance and interest costs due to higher rates), but also because Synchrony is cutting credit. Management now expects purchase volume to be down in the second half of 2024. The only positive in the results was improvement in delinquencies, but that may reflect actions by Synchrony to more quickly get after customers that are past due. CEO Brian Doubles shared, “Our customers continue to be discerning in their discretionary purchases, particularly in larger ticket categories, such as home furnishings, travel and entertainment...That said, our customers are spending slightly less per transaction across most categories and credit rates grades as average transaction values declined about 2% versus last year. Only our top credit segment saw growth in average ticket values during the second quarter. Customers across credit grades are transacting more frequently, however, which has generally offset most of the impact of lower transaction values.” We strongly suspect that the increased shopping frequency reflects households shopper multiple banners for their groceries in order to pick the top value in a banners offering, cherry pick promotions, and to clip digital offers in apps which are being deployed more frequently (which we discussed here). Unrelatedly, Synchrony’s and Citigroup’s results point to a negative development for retailers’ credit card earnings stream, now anniversarying last year’s negative trend (i.e., it's going to be a two-year depression). Lastly, we’d point out that a lot of all this reflects the Fed’s monetary tightening which began February 2022 (i.e., it was a two-year transmission cycle).
As it relates to the more-affluent, the pace of spend in American Express book of business is coming off its double-digit boil and settling into mid-single-digit growth; moreover, as shown in the table below spending on “stuff” has been at roughly the same rate as “fun” for the last nine months as we move past 2023, the peak year of more fun. Separately, the faster pace of spending for American Express’ Millennials and Gen-Z reflects new account additions; but it also reveals that there has been no spending pullback by the more-affluent Millennial and Gen-Z consumer.
On its Q2 2024 earnings call, American Express CFO Christophe Le Caillec said:
“We did see some slower growth in certain Travel & Entertainment (T&E) categories versus the prior quarter, such as in airline and lodging. At the same time, growth in our largest T&E category, restaurants, remain strong and Goods & Services strengthened a bit versus the prior quarter when excluding the impact of leap year.
Stepping back, while spend growth in certain categories was slightly higher, or lower versus the prior quarter, overall spend growth was stable and we continued to see strong growth in the number of transactions from our Card Members which grew 9% this quarter...Millennial and Gen-Z customers grew their spending 13% and continued to drive our highest billed business within this segment.
These younger Card Members continue to demonstrate strong engagement and we see that they transact over 25% more on average than our older customers, and in some categories, like dining, they transact almost twice as much.”
American Express CEO Steve Squeri said:
“The U.S. consumers been pretty consistent and we think it's going to be pretty consistent throughout the year.”
Also of note, unlike with Synchrony there was no mention of tightened credit lines. Net write-offs were stable at 1.7% (Synchrony’s were 4.75%) and the provisions to reserves for losses of $1.1M were lower quarter-over-quarter and year-over-year; Synchrony’s increased from $1,383M last year to $1,691M. Obviously, it’s Synchrony’s customers that end up paying for those provisions in the form of higher interest rates and fees, thus making it one of the incremental headwinds to discretionary consumer spending by the non-affluent in 2024 (i.e., the second shoe to drop following high inflation in essentials knocking the first shoe off).
Back to The Fed Reserve and interest rates, we’ve highlighted the Fed’s Beige Book as an important economic report to the Fed’s view on the economy, prices, and monetary policy. July’s addition was released this week and its description of the economy, plus, Fed Chair Jerome Powell’s more dovish speeches this week, and last, has led financial markets to price in a higher chance of interest rate cuts at/ by the September 18th meeting (94% chance). (Nobody expects much from the FOMC’s next meeting with July 31st being the Statement and Powell’s subsequent press conference.) Below we have taken some sections of the Beige Book that relate to this story; we also believe that the July report was “music to the ears” of the Fed’s FOMC and Powell. Up next is the Jackson Hole Economic Symposium hosted by the Kansas City District, August 22-24. That event is where Powell often signals significant changes in monetary policy. Maybe at this year’s he sings a tune in the spirit of Georg von Trapp, “The Tetons are filled with sound of music…” where he conveys a high level of confidence that the fight on inflation is nearly over and that a soft-landing looks increasingly achievable. The later date also gives the FOMC a look at CPI and unemployment for July.
As to the July Beige Book, it read, “Prices increased at a modest pace overall, with a couple Districts noting only slight increases. While consumer spending was generally reported as showing little to no change almost every District mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items, or shopping around for the best deals.”
For the San Francisco District it read: “Households pulled back on their spending at a faster pace than retailers had expected. While demand was stable for groceries and produce, sales of luxury goods and other large purchases weakened as consumers continued to reduce spending on nonessential goods. Consumers were characterized as more cautious with spending decisions and reluctant to pay full price… Demand for leisure and hospitality fell, and restaurants across the District reported lower consumer spending overall, driven in part by less spending per visit.
Dallas read, “Retail sales declined moderately during the past six weeks, with weakness ascribed partly to seasonality and partly to elevated pricing and borrowing costs curtailing consumer demand. Food and beverage stores noted modest sales increases, while auto dealers and nonstore retailers reported declines. Overall, retail outlooks remained negative."
Atlanta read, “Firms' pricing power weakened. Consumer spending was flat. Leisure travel softened...Shoppers remained cautious with discretionary spending, seeking heavy discounts, and diligently comparing prices when purchasing more expensive items. Auto dealerships reported that manufacturers continued to offer incentives to boost sales, which were relatively flat compared with a year ago. Tourism and hospitality contacts noted lower than expected demand for leisure travel since the previous report; however, group and business travel continued to improve. Hotel occupancy and average daily rates moderated over the reporting period, and on-property food and beverage spending fell below expectations. Hospitality contacts expect activity to remain flat for the rest of the year.”
