Filling up the tank could cost less this summer, and that would likely be a positive for consumer spending.
The U.S. national average for regular gas was $3.44 a gallon on Monday, versus $3.626 a month ago and $3.59 a year ago, according to data from the American Automobile Association (AAA). The AAA said in a blog post that tepid gasoline demand, increasing supply, and falling oil costs will likely lead to falling pump prices.
Tepid gasoline demand represents a change from a few years ago when summertime signified the start of road trips and rising demand for gas for the car. Demand has shifted with the onset of rising inflation in a post-COVID world.
“This drop in pump prices appears to have some sticking power for now,” AAA spokesman Andrew Gross said. “More states should see their averages dip below $3 a gallon in the coming weeks.”
Consumers also got the benefit of easing inflation in May as the Consumer Price Index (CPI) was flat for the month, even though it rose 3.3 percent from year-ago levels. Helping CPI was a 2 percent decline in the energy index, which includes a 3.6 percent drop in gas prices, and only a 0.1 percent uptick in food prices. Excluding food and energy prices, core CPI rose 0.2 percent in May, according to the Bureau of Labor Statistics on Wednesday.
Consumer Spending
While consumer confidence rose in May after three consecutive months of decline, consumers are cautious about the future. The Conference Board’s Consumer Confidence Index in May rose to 102 from 97.5 in April. But the expectations component, which looks at consumer outlook six months out, only rose to 74.6 from 68.8 and was below 80, the level that typically signals a recession is on the way.
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Giving a boost to consumers’ confidence levels was the still relatively strong labor market. On Friday, the Department of Labor said nonfarm payroll jobs increased by 272,000 in May. But that report also raised some caution ahead as data indicated that the unemployment rate inched up to 4 percent, up from 3.7 percent a year ago.
But the Conference Board’s Employment Trends Index (ETI), which posted a slight uptick to 111.44 in May from a downwardly revised 110.48 in April, suggests possible caution ahead.
“The ETI rose in May, another small oscillation that we have continued to observe since the ETI started the downward trajectory its been on since a peak in March 2022,” Will Baltrus, The Conference Board’s associate economist, said. “May’s uptick signals employment could increase in the second half of 2024, but the ETI’s longer-term downward trajectory signals the high level of monthly increases in employment observed post-pandemic could slow down.” The good news is that even if monthly employment levels slow down, Baltrus said it would mostly likely be due to a deceleration in hiring rather than a scenario consisting of aggregate job losses.
Foot traffic trends in April declined, possibly due to the Easter holiday falling in March this year, according to Jefferies’ retail and real estate senior analyst Linda Tsai. Placer.ai’s Mall Index indicates that mall visits rose in May, likely with Mother’s Day and Memorial Day boosting foot traffic at indoor malls, open-air shopping centers and outlets. What foot traffic trends may signal for the second quarter remains to be seen.
Some retailers did well in the first quarter, with off-price a standout. The behemoth in the category is The TJX Cos. Inc., which bested Wall Street’s consensus estimates for diluted earnings per share and revenue expectations. TJX’s CEO Ernest Herrman said the off-pricer is seeing shoppers who have an annual household income range that is above and below $100,000.
Michael O’Sullivan, CEO at TJX’s competitor Burlington Stores Inc., said his stores are seeing an increase in the trade down customer base. Burlington’s two main customer segments are deal shoppers typically with lower incomes and want-a-deal shoppers with higher incomes.
And perhaps a sign of the consumer mindset, the dollar store sector is also seeing a rise in consumers trading down to stretch their spending bucks. Dollar General CEO Todd Vasos cited an increase in shoppers form the middle- and higher-income levels. And extreme value chain Five Below Inc. CEO Joel D. Anderson said the company is also seeing higher-income consumers trading down as they seek value, although they’re less discerning with spending when compared with their lower-income counterparts.
At the department store sector, Dillard’s Inc. CEO William T. Dillard, II said the “consumer environment remained challenging” in describing the current retail backdrop. Kohl’s Corp. CEO Tom Kingsbury said in a statement that while first-quarter results failed to meet company expectations, the department store retailer did see regular price sales rise year-over-year, with positive trends in its women’s business.
For now, consumers are still spending. “Consumers have clearly retained their ability to spend and are driving solid economic growth said Matthew Shay, president and CEO the National Retail Federation (NRF), a retail trade group. “Spending is being supported by the job market and real wage gains. Inflation remains stubborn but is almost entirely in services rather than retail goods.”
NRF on Tuesday said its latest CNBC/NRF Retail Monitor showed that retail sales “jumped significantly in May.” Total retail sales, excluding automobiles and gasoline, were up nearly 1.35 percent month-over-month, seasonally adjusted, and up 3.03 percent year-over-year, unadjusted. The data, based on anonymized credit and debit card purchases compiled by Affinity Solutions, also showed that sales at apparel and accessories stores were up 1.4 percent month-over-month, seasonally adjusted, and up 6.2 percent year-over-year, unadjusted.
Concerns ahead for retail
Some still see signs of caution ahead for retailers. Concerns include where consumers elect to spend their dollars, as well as price points that trigger a purchase even though there may be corresponding impacts on retail margins.
“With more than 75 percent of the U.S. consumer universe having reported Q1 results, we see indications that the U.S. consumer is proving more stretched than previously anticipated,” concluded research analysts in a Goldman Sachs report last month. The report noted that the macro-economic environment has forced some consumers to make “trade-off purchase decisions.”
That’s not a new trend, and discretionary spending choices in general have seen a slowdown in apparel purchases as consumers focus on must-have items. Moreover, a UBS report from Jay Sole on Monday noted that softline promotions rose year-over-year in May, with out-the-door prices falling 1.5 percent year-over-year last month. And while softline retailers raised ticket prices in 2022 and 2023 in response to high cost inflation, they were able to maintain those price gains until recently. But with prices now falling, Sole’s conclusion is the “demand remains lackluster.”
Looking ahead, Sole said: “Lower raw material costs year-over-year should positively impact softline companies’ cost of goods sold for another month or two. This could offset the impact to margins from falling prices in the near term.” He also pointed out that if the falling price trend continues “once the industry laps the lower raw material cost benefit, it could lead to pressure on gross margin.” And that could mean an issue for retailers at the tail end of the second quarter and start of the third quarter, which begins in August.
One other spending concern to keep in mind might be how consumers handle their debt loads. Dana Telsey, chief investment officer at The Telsey Group, noted that consumer credit has deteriorate with delinquencies “ticking up to pre-pandemic levels, and in some cases, surpassing those levels.” Citing a 2024 TransUnion first quarter credit report, she note the report highlight that inflation challenges and higher interest rates are causing consumers across all income levels to turn to credit to cope with financial pressures.
Data from WalletHub indicates that U.S. consumers paid down $50 billion in credit card debt during the first quarter of 2024, but that they still owe more than $1.26 trillion. The average owed per household is $10, 479, while preliminary results for April reflects a 4 percent increase in debt versus April 2023.