Consumers load up on debt to fund their spending
Despite high inflation and rising interest rates, consumer spending has remained fairly robust. In July, American retailers tallied $696.4 billion in sales, up 0.7% from June and easily beating Wall Street’s forecast of a 0.4% gain. Over the past 12 months, retail sales have increased by 3.2%. Released each month by the U.S. Census Bureau, the retail sales report consists of receipts from stores and merchants, incorporating all in-store, internet and catalogue sales.
In July, nine of the 13 retail sectors reported a monthly increase in sales. The worst performing sector was Furniture & Home Furnishing Stores where monthly sales fell 1.8%. This was followed by Electronics & Appliance Stores which reported a 1.3% monthly decline.
The sector reporting the biggest gain was Nonstore Retailers, which consists primarily of online retailers and catalogue sales. Nonstore Retailers posted a stellar 1.9% monthly gain in sales. This was fueled in large part by Amazon Prime Day, Amazon’s signature annual event that offers shoppers significant discounts and promotions. This year’s two-day event was held on July 11-12.
According to estimates by Adobe Analytics, Amazon captured a record-high $12.7 billion in sales over the course of those two days, up 6.1% from last year. Consumer insight company Numerator further estimates shoppers spent an average of $54.05 per order. Amazon states its online shoppers purchased more than 375 million items during its two-day shopping event, up from 300 million last year.
The great unknown is just how long consumers can continue opening up their pocketbooks. To help pay the cost of rising prices, millions of consumers have been forced to pull money from their savings and retirement accounts. Americans have also taken on a massive amount of debt.
According to the Federal Reserve Bank of New York, in the April-June second quarter, household debt in America reached a record-high $17.06 trillion. This is up 5.7% from the second quarter of last year and up nearly 20% from the second quarter of 2020. Included in this household debt is a record-high $1.03 trillion in credit card debt, the first time ever the level of credit card debt has breached the $1 trillion mark.
Inflation has also remained stubbornly high. The last time inflation was at or below the Federal Reserve’s 2% target rate was February 2021 when inflation was reported at just 1.7%. Inflation has been gradually declining over the past 12 months but in July it suddenly rose from 3% to 3.2%. In its efforts to help get inflation under control, the Federal Reserve has pushed interest rates to a 22-year high.
The combination of high inflation and rising interest rates is a potent tandem. Together, they pose significant obstacles to the continued strength of consumer spending. But, so far, consumers still appear willing to keep their pocketbooks open.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Quad Cities Investment Group and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Quad Cities Investment Group unless a client service agreement is in place
