Former Walmart CEO warns that American consumers are nearing their limit.
The American Consumer on the Verge of Folding, Says Former Walmart CEO
The all-mighty American consumer, whose spending drives the economy, is reaching a breaking point and is on the verge of folding, according to former Walmart CEO Bill Simon.
Mr. Simon told CNBC in a recent interview that a series of factors—political polarization, inflation, and high interest rates—were all working together to undermine consumers and their propensity to spend.
“That sort of pileup wears on the consumer and makes them wary,” Mr. Simon told the outlet. “For the first time in a long time, there’s a reason for the consumer to pause.”
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Consumer spending is a major driver of the U.S. economy, accounting for roughly two-thirds of gross domestic product (GDP).
Mr. Simon, who now serves on the Board of Directors for Darden Restaurants and Hanesbrands Inc., said that, after a long period of cheap money cut short by the Federal Reserve’s rapid rate hikes in response to soaring inflation, consumers are now beginning to buckle.
“Consumers had an incredible 10-, 12-year run,” he told CNBC’s ”Fast Money” program. “Markets were buoyant. Interest rates were low. Money was available.”
Inflation ‘Still Above Comfort Levels’
Despite all the monetary tightening so far, inflation remains uncomfortably high.
The government released the latest data on inflation on Thursday, showing that the Consumer Price Index (CPI) rose 3.7 percent in September, matching August’s pace. While that’s down from a recent peak of 9.1 percent in June 2022 and lower than the 8.2 percent pace a year ago, it’s still well above the Fed’s inflation target of 2 percent.
Even though a number of Fed officials have, in recent days, suggested that the rate-hiking cycle may have reached its peak, newly released minutes detailing internal discussions during the Fed’s latest rate-setting policy meeting in September show most of them think one more rate increase is in store—followed by a period of higher interest rates for ”some time.”
The higher-for-longer interest rate environment means tighter financial conditions, marked by more expensive borrowing and reduced lending, putting a damper on economic activity. It also tends to mean less consumer spending.
Waning Consumer Strength?
With persistently high inflation and a deteriorating economic outlook, September saw consumer confidence fall for the second consecutive month to hit a four-month low, according to the Conference Board.
Also, expectations about the economic outlook over the next six months dropped below the Conference Board’s recession threshold of 80, reflecting waning confidence about business conditions, job availability, and earnings.
“Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates,” Dana Peterson, chief economist at the Conference Board, said in a statement.
All that consumer worry is likely to translate into reduced spending if it hasn’t already. The latest consumer spending data is for August, and it shows personal consumption expenditures (PCE) growing 0.4 percent that month, less than half of July’s pace of 0.9 percent.
A recent survey carried out in September by CNBC-Morning Consult found that 92 percent of U.S. adults have cut back on spending over the past six months.
Looking forward, over three-quarters of those polled said they plan to cut back on spending for non-essential items.
Further, a recent survey of consumer expectations from the New York Federal Reserve shows that more U.S. households report being financially worse off now than they were a year ago.
Forty-one percent of households say they’re financially worse off than a year ago, up from 40 percent in August.
Unsurprisingly, given the Fed’s series of aggressive rate hikes and speculation that more could be in store, households’ perceptions of and expectations for credit conditions deteriorated.
The survey also gauged consumer spending intentions one year ahead. While these remained unchanged in September at 5.3 percent, they generally fell steadily from a peak of 9.0 percent in May 2022.
A number of large retailers, such as Target, have reported a drop in discretionary spending.
“There is some real concern about weakness in the consumer,” Sarah Hunt, a partner at Alpine Saxon Woods, told Bloomberg TV in an interview at the end of September.
“There’s a real spending issue coming up and I think that’s going to impact earnings.”
How does the decline in consumer spending in August affect the U.S. economy and businesses, and what measures can be taken to stimulate economic activity
Nding data from the U.S. Department of Commerce showed a 1.7 percent decline in August, the largest drop in consumer spending in almost a year. This decline comes after several months of strong consumer spending growth, highlighting a potential shift in consumer behavior.
Mr. Simon believes that the current state of political polarization in the country is adding to consumer uncertainty. With the deep divides in the nation, consumers may be hesitant to make large purchases or invest in the economy. Additionally, rising inflation and high interest rates are taking a toll on consumers’ wallets, making them more cautious about their spending habits.
The impact of inflation on consumer confidence cannot be underestimated. Even though the rate of inflation has slightly decreased from previous months, it remains above the Federal Reserve’s target. This sustained high level of inflation erodes consumers’ purchasing power and puts pressure on their budgets, ultimately leading to reduced spending.
Furthermore, the recent minutes from the Federal Reserve’s rate-setting policy meeting indicate that there may be further rate hikes and higher interest rates in the near future. This anticipation of tighter financial conditions further deters consumers from spending as they may opt to save or pay down debt instead.
The Conference Board’s data on consumer confidence reflects this growing concern among consumers. With decreasing confidence in the economic outlook, consumers are less optimistic about business conditions, job availability, and their own earnings. Rising prices, especially for essentials like groceries and gasoline, along with worries about the political situation, further contribute to this erosion of consumer confidence.
The decline in consumer spending in August is a clear indication that consumers are becoming more cautious. While it is too early to determine whether this is a long-term trend or a temporary setback, the factors highlighted by Mr. Simon suggest that consumers are on the verge of folding. Their propensity to spend and contribute to the economy may continue to decline if these challenges persist.
This shift in consumer behavior has significant implications for the U.S. economy. Consumer spending is a major driver of GDP, and a decrease in spending can lead to slower economic growth. Businesses may also be affected as reduced consumer spending impacts their revenue and bottom line. Government policymakers and economists will need to closely monitor these trends and take appropriate measures to support consumer confidence and stimulate economic activity.
In conclusion, former Walmart CEO Bill Simon’s warning about the American consumer’s vulnerability is a concerning development for the U.S. economy. A combination of political polarization, inflation, and high interest rates threaten to undermine consumers’ willingness to spend and contribute to economic growth. As consumer confidence wanes and spending declines, it becomes crucial for policymakers and businesses to address these challenges and find ways to support and strengthen the American consumer.
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