The outlook for consumer spending may be dimming if you glance at some of the recent earnings reports from some of the nation’s largest companies.
Ecommerce giant Amazon.com and gadget maker Apple raised eyebrows with disappointing sales outlooks going into year-end holidays. Both companies expect sales growth in the final quarter to slow as inflation eats into consumer spending. Amazon stock fell on the news but Apple stock rose.
Though those are only two companies, they’re among the largest and can give investors insight into economic trends, which way stocks may move, and how consumers are behaving even before government reports make those tallies.
“We’re realistic that there’s various factors weighing on people’s wallets, and we’re not quite sure how strong holiday spending will be versus last year,” Brian Olsavsky, Amazon chief financial officer, said in the company’s earnings conference call.
What are Amazon and Apple forecasting?
Amazon said it expected its fourth-quarter sales to grow only 2% to 8% from the year-ago quarter, and operating profit could be as low as $0.
Amazon’s sales guidance is about 7% below what analysts on average were expecting and up only 13% from the third quarter, “which is meaningfully below the 33% average growth in the five years before the pandemic,” said Jefferies analyst Brent Thill.
Bank of America noted Amazon’s “holiday revenue outlook was surprisingly weak,“ and “by far the lowest on record, even in recession impacted 2008.”
Meanwhile, Apple remained cagey on its sales guidance. It would only say it expected sales to grow less than the 8% seen in the third quarter even though the fourth quarter has an extra week. Sales of Mac computers and services were slowing, it said.
Inflation gobbles up dinner:Inflation hits the Thanksgiving table: Turkey costs may be higher this year.
How does this compare with consumer spending data?
Though many companies are seeing a slowdown in consumer spending, government data aren’t yet clearly showing this.
Friday morning’s personal income and spending data showed consumers continued to spend through September. Adjusted for inflation, or so-called real, spending rose 0.3%, holding the year-over-year rate steady at 6.2%, even as disposable income essentially flat lined in September.
On Thursday, the Bureau of Economic Analysis said the economy grew an inflation-adjusted 2.6% in the third quarter, reflecting “increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending.”
What should we believe?
Almost all economists side with companies in predicting a steep slowdown in consumer spending.
“This spending is driven by an unsustainable draw-down in the saving rate and over-reliance on credit,” said Tim Quinlan, Wells Fargo senior economist.
Economists may say spending is unsustainable, but month after month, consumers continue to spend even through rising inflation. Because spending grew faster than income in September, the eighth time in nine months, the savings rate dropped to 3.1%, the lowest level since April 2008, right before the globalfinancial crisis.
Americans also are taking on credit card debt at the fastest pace in more than 20 years. According to LendingTree, since second-quarter 2021, credit card balances have risen by $100 billion – a 13% year-over-year increase. Americans are carrying an average of $6,569 in credit card debt.
If consumers have a breaking point, when will it be?
No one knows when consumers will finally hit a wall, but economists and companies expect it to be soon, though perhaps not until after the holidays as people push through to try to keep things merry even if slightly less bright.
A holiday survey of 4,986 consumers by Deloitte shows people plan to stay within budget by buying 44% fewer gifts – an average of nine gifts this year, down from 16 last year. And those presents may not be shiny and new because 32% of consumers plan to buy resale items.
After that, “spending should slow down significantly…with the holiday hangover and as savings continue to dwindle,” said Tuan Nguyen, RSM economist.
If not, “we suspect it will not end well unless real disposable income picks up,” Quinlan said.
Are companies going to wait and see?
While consumers may not yet be ready to batten down the hatches, companies are in case the slowdown hits swiftly.
Ninety-eight percent of chief executives surveyed by The Conference Board said they’re preparing for a U.S. recession over the next 12-18 months.
Stagflation or recession?:The US may be at risk for stagflation. Here’s what that means.
Apple already laid off recruiters in a bid to save money and as a sign it doesn’t plan to keep hiring much. This week, Alphabet announced a hiring freeze, Verizon cut some jobs, and Facebook parent Meta and chip giant Intel plan to pare positions.
Amazon’s also tightening its belt, “including pausing hiring in certain businesses and winding down products and services,” Olsavsky said.
After Amazon’s earnings report, Bank of America analystsled by Justin Post, said in a research report “the recession may be here already.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.