The retail apocalypse was bloodier than it looked

Retail in May 2022 was a bloody mess, and revenue looked fine. Target and Walmart reported higher sales and their shares fell by a quarter and a tenth in a day, Target’s the worst since the crash of 1987. That does not make sense on its face, and the purpose of this page was to make sense of it, chart by chart, using the data published that week.

The good news, briefly

Real spending on goods, adjusted for inflation, rose in April and remained well above its pre-pandemic trend, though down from the stimulus-fed peak of 2021. Durable goods, refrigerators and cars, looked as if they might be returning to a rising trend. Non-durables, food and fuel and household supplies, were sliding gently from their reopening surge. Services spending, the larger part of the economy, remained far below its old trend. Adjust that for population and the picture was worse. But in total real dollars spent, the consumer looked, at first glance, healthy.

The mess behind the mask

Then look at what the spending was made of. Real personal income excluding government transfers, that is, what people earned rather than what they were sent, was flat and losing ground against its pre-pandemic trend. Per person, after tax, and even with the transfer payments included, it was anaemic. If that line were a hospital chart, nobody would be reassured by it.

So the spending was being financed. Household borrowing was rising again. The personal savings rate, the share of income put away each month, had fallen to its lowest since the worst months of 2008; the average savings balance reported by one survey had fallen 15 per cent in a year, from about 73,000 to 62,000 dollars, an average that includes the very rich and is not adjusted for inflation. Credit-card debt was growing at the fastest rate in the series. The consumer was not resilient. The consumer was borrowing to keep up appearances, and appearances in retail are dollar sales.

Where the bodies were

Adjust the reported revenue growth of the big retailers for inflation and most of them had negative real growth year on year, consistent with the first-quarter GDP contraction recorded earlier in this section. That is what investors saw when they turned over the earth beneath the headline. Target’s profit fell by half on the revenue rise because its costs had risen faster and because it had bought inventory for a consumer who was no longer buying discretionary goods; Walmart’s margins were squeezed the same way; Amazon reported its first loss in years. The trade press wrote of a “retail apocalypse”, and this page’s point was that it was not caused by inflation hurting sales. It was caused by inflation hiding, in the sales figures, a consumer who had already stopped.

Taking inventory

The inventory glut was the tell. Retailers had ordered through 2021 for the shortages of 2021 and received the goods in 2022, when the shortage had moved from goods to the money to buy them. Target announced within days that it would cut prices to clear stock, which is a deflationary act by a company in an inflationary year, and it was the first sign that the goods side of the inflation had peaked. It was, at the same time, the sign that the consumer had.

Later note. Goods inflation peaked in the summer of 2022 and fell to near zero by 2023 as retailers cleared inventory, while services inflation continued. Credit-card debt passed a trillion dollars for the first time in 2023, the savings rate stayed below its pre-pandemic level, and the pandemic savings that had funded 2021 were, by most estimates, exhausted by early 2024. The consumer kept spending throughout, which is the part of this analysis the data did not bear out, and kept borrowing to do it, which is the part it did.