The Retail Sector Waits to See If Consumers Will Stop Spending

There have been many predictions about the timing of the next recession, with the majority of forecasters settling around a point next year. Perhaps the most aggressive of these predictions has come from former Federal Reserve Governor Lawrence Lindsey, who told CNBC this week that the Fed is “nowhere close” to being able to control inflation. 

“I do think we’re going to have a recession, probably in the next quarter,” Lindsey said in remarks reported by MarketWatch.  “Inflation is eating into consumer spending power, they’re going to have to cut back.”

Lindsey said inflation could also move even higher, with consumer inflation possibly rising 1% or more on a monthly basis—a move that hasn’t been observed since summer 1980. 

“That’s going to push consumer purchasing power down by about 2 points on top of the 2.5 points it has already declined since the beginning of 2021,” Lindsey told CNBC. “You can’t have that much of a shock without having a recession,” he said.

A recession is not a welcome development for any CRE asset class, but one led by a cutback in consumer spending would clearly hurt the retail sector—just as it has overcome the shock of the pandemic and is now enjoying a robust recovery 

For the moment, the retail sector remains solid. Vacancy rates for neighborhood and community centers stayed stable at 10.3% while regional and super mall vacancy pushed down 20 basis points in March, according to Moody’s Reis.

“Despite unknowns around future consumer spending and sentiment, the retail sector has so far remained resilient,” Moody’s noted in its report.

Consumers still appearing to be spending at a quick pace despite enduring months of rising inflation, with retail sales rising a seasonally adjusted 0.5% in March over the prior month’s numbers. Also, according to Bank of America, aggregate credit and debit card spending was up 11% year-over-year in March, while card spending per household was up 6.7%. 

The firm notes that leisure spending appears to be stabilizing as more households begin branching out into experiences and travel after several years of a heavy focus on goods-related spending, and Americans also appear to have more cash saved in their coffers.

“While these cash buffers are not limitless, it appears that consumers should be in a position to weather the current challenge of rising prices for some time,” Bank of America’s David Tinsley writes. “The key of course will be the duration of the inflationary shock. With most forecasters expecting some easing in inflationary pressure over this year, things should hopefully get easier for the most challenged consumers.”

But  there are indications that consumers are starting to fret. In a recent survey  by CNBC + Acorns Invest in You that was conducted by Momentive, the overwhelming majority of Americans fear higher prices will force them to rethink their financial choices in the coming months. 

Already 53% say higher prices have caused them to cut back on dining out in the last six months, while 39% say they’ve cut back on driving, canceled a monthly subscription (35%) or switched from a brand-name product to a generic one (32%). 

Perhaps even more notable, 45% of people in households with income between $50,000 and $100,000 and 40% of people with household incomes in the six figures or higher say they think of rising prices all of the time.