After a year-long droop, client buying energy will probably be again in 2023

Customers shop at a Walmart in Houston on August 4, 2021.

Brandon Bell | Getty Images

After a year-long slump, household cash flow will pick up just after Christmas and accelerate in the new year, according to a new study by analysts at Goldman Sachs.

Those gains will reverse a year of negative growth of about $600, or 4.2% of household discretionary cash flow, according to Goldman’s analysis.

“This year is the first time we’re looking at negative discretionary cash flow since the 2008-09 financial crisis,” Jason English, Goldman’s consumer goods analyst, said in a recent webinar with press. The biggest driver of cash flow improvement next year, he said, will be wages.

It’s good news for retail sales after years of struggling to keep up with inflation and for the economy’s ability to avoid a recession, according to Mark Zandi, chief economist at Moody’s Analytics, who has a similar forecast for improving consumer finances .

“Cash flow was hit in 2022, but it’s coming back and cash flow is driving spending,” Zandi said. “Companies are unlikely to cut jobs because they know their biggest problem is finding workers,” Zandi added.

The link between consumer cash flow and retail

While there has been much talk of consumer resilience at a time of slowing economic growth, the market has punished retail companies, which have fallen about twice as much this year as the broader U.S. stock market index, as measured by the relative performance of the SPDR S&P Retail ETF and S&P 500 Index. This year’s sloppy performance in consumer spending comes as households receive less cash – despite having more savings – since stimulus payments to combat the Covid pandemic ended in 2021.

Retail sales in the US are up about 10% in the last year, but most of that reflects the rising dollar value of gasoline and other goods, which are being sold at this year’s inflated prices, according to the latest data from the Commerce Department. Auto sales are up just 1.5 percent, well below the pace of inflation. This has helped inflation-adjusted consumer spending growth slow to about 1.5 percent in the first half of 2022, compared to nearly 12 percent a year earlier.

The surge in capital goods spending during the brief Covid recession, as consumers bought furniture and other household goods as they spent more time at home due to the pandemic, contributed to the slump in retail this year as it pulled demand forward, he said English.

But according to Goldman, the turning point is coming.

The decline in consumer cash flow started steeply, but the range between 2021 and 2022 has steadily narrowed. In the first quarter, consumers had 10% less cash on hand than in the same month last year, which Goldman says will be capped at a 2.7% decline this quarter and a 1.2% decline for the holiday season.

Goldman’s cash flow measure adds other sources of money, such as government transfers and borrowing, to current income and subtracts essential expenses, such as groceries and fuel, giving a more complete picture of consumers’ likely ability and willingness to spend.

Next year, numbers will turn more positive as the year progresses, Goldman’s estimates show. Consumer cash flow will grow 2 percent in the first quarter and grow to over 6 percent in the second half of 2023, for total gains of about $600 billion.

Large retailers may benefit the most

While the increase in consumer income is good news for the economy, it may not benefit all businesses equally, according to Arun Sundaram, an analyst at CFRA Research, who believes the increase in consumer income will help big retailers the most. Big players like Amazon and Walmart, and to a lesser extent Target, will be winners and gain market share, he said.

Sluggish retail conditions this year could prevent smaller consumer companies from accessing capital markets, which have become more selective even as conditions improve. “They should have raised money a year ago,” Sundaram said. “Now the markets are tighter… They’re trying to cut spending and reduce their cash burn.”

While Sundaram has focused on consumer startups that have gone public in recent years, such as Oatly and Beyond Meat, sentiment among America’s broader small business community is not optimistic as inflation continues to hurt Main Street’s ability to maintain margins at times sustaining higher prices for inputs, from commodities to energy, transportation and labour. Most small business owners believe a recession is inevitable; In fact, some believe the recession has already begun and have scaled back their sales outlook for next year, according to the latest CNBC|SurveyMonkey Small Business Survey for Q3 2022, which saw small business confidence fall to an all-time low.

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Meanwhile, the world’s largest retailer Walmart — which cut second-quarter profit targets but then reported a hit on Aug. 16 — devoted much of its second-quarter earnings call to explaining its investment plans — which CFO John David Rainey said will be a source of the chain’s hopes of boosting profitability in the coming year.

Walmart increased capital spending by 50% to $7.5 billion in the first half of its fiscal year, which ends in January. Rival Target, which saw profits fall 90 percent in the second quarter, nearly doubled its investments to $2.52 billion from $1.34 billion. Speaking to analysts after the earnings, Walmart CFO John Rainey cited the expansion of automation and technology across the company and how it will continue to help drive efficiencies. He pointed to the company’s augmented reality Viz Pick technology, which uses workers’ cellphones to speed up shelf restocking and avoid lost sales.

Ahead of the imminent surge in customer incomes, retailers have yet to weather the back-to-school and holiday shopping seasons when household incomes will still be slightly lower than in 2021 and retailers will still be dealing with excess inventory of household-related goods that they are depreciating and depreciating to have.

“If we’re free until the holidays, we’re in much better shape going forward than the market is currently recognizing,” English said.

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