Inflation, Return To Normal Change The Way American Consumers Spend Their Money

Persistent inflation and the return to normal are changing how American consumers spend their money.

They spend more on services like eating and drinking out and less on goods like furniture and electronics.

That's according to the November 2022 U.S. retail sales report released by the U.S. Census Bureau on Thursday morning. It showed that consumers spent 0.6% less in November than the previous month, the most significant decline thus far this year and far worse than the market forecasts of a 0.1% decline.

Most of the declines in sales were in the goods sectors, with furniture down 2.6%, building materials down 2.5% and motor vehicles down 2.3%.

These declines were partially offset by a rise in the sales at food services and drinking places, up 0.9%; food and beverage stores, up 0.8% and health and personal care stores, up 0.7%.

The change in the consumer spending pattern is driven by persistently high inflation. It has been squeezing family budgets, leaving less money for discretionary like furniture and autos.

Then there's the fading fear of COVID-19 infections and the return of life to normal. As a result, people rush to enjoy what they missed during the intense stage of the pandemic, like eating and drinking out and visiting personal care outlets.

And there are rising interest rates, which have taken their toll on interest-sensitive sectors like home improvement and furniture.

The news of weaker-than-expected retail sales is a mixed blessing for Wall Street. On the one side, it is a sign that the Federal Reserve's interest hikes are beginning to work. Thus, the nation's central bank may have to end rate hikes sooner rather than later, a good development for equities.

On the other side, it is a sign that the economy may be heading into a severe recession, which could hurt corporate earnings. This is not a good thing for equities, especially the equities of economically sensitive companies.

Thursday's market action suggests that Wall Street is more concerned about the second rather than the first prospect, as the Fed reiterated its intention to keep raising rates in Wednesday's FOMC meeting.

Still, retail experts consider the decline in November sales an aberration rather than a trend due to hefty discounts by retailers in October, which stole sales from November.

"With many retailers starting holiday season promotions as early as October, it is not shocking that sales fell in November," Natalie Kotlyar, national leader of BDO's Retail and Consumer Products practice, said. "Many consumers likely took advantage of these early deals in October and spent less in November. It also indicates that inflation is starting to impact consumers, who may have decided to pull back on their holiday spending. But that could change if inflation slows and the economy normalizes."

Naveen Jaggi, president of Retail Advisory Services, provides further insight into how last year's low inventory prompted many consumers to finish their holiday shopping early to avoid shipping delays. "This year, retail giants such as Target, Best Buy and Lowe's have been busy the entire holiday season, placing inventory orders and filling the shelves earlier than usual," he said. "Leaving consumers confident that they can finish holiday shopping last minute."