According to recent Goldman Sachs research, after a year-long decline, household cash flow will begin expanding again shortly after Christmas and rise into the new year.
According to Goldman’s calculations, these gains will offset a year of negative growth in household discretionary cash flow of around $600, or 4.2%.
“We’re looking at negative discretionary cash flow this year for the first time since the 2008-09 financial crisis,” Goldman consumer goods analyst Jason English said at a recent press teleconference. Wages, he says, will be the primary driver of cash flow improvement next year.
According to Mark Zandi, chief economist of Moody’s Analytics, this is good news for retail sales following a year-long struggle to stay up with inflation, as well as for the economy’s capacity to avoid a recession.
“Cash flow took a hit in 2022, but it’s returning, and cash flow is what drives spending,” Zandi explained. “Businesses are unlikely to cut jobs because they understand that their biggest problem is finding workers,” Zandi noted.
The relationship between consumer cash flow and retail sales
While much has been made of consumer resilience in the face of slowing economic growth, the market has punished retail companies, which have fallen roughly twice as much as the broader U.S. stock market index this year, as measured by the relative performance of the SPDR S&P Retail ETF and the S&P 500 Index. This year’s poor consumer spending performance is due to households having less cash coming in — despite having larger savings — as stimulus funds aimed to combat the Covid epidemic terminated in 2021.
According to current Commerce Department figures, retail sales in the United States have increased by nearly 10% in the last year, but the majority of it is due to the rising dollar worth of gasoline and other goods sold at this year’s inflated rates. Auto sales have increased by only 1.5 percent, well below the rate of inflation. This has aided the slowing of inflation-adjusted consumer expenditure growth to around 1.5 percent in the first half of 2022, down from nearly 12 percent the previous year.
The rise in capital goods expenditure during the brief Covid recession, when consumers scooped up furniture and other home-related products as they spent more time at home owing to the epidemic, contributed to retail’s collapse this year by pushing demand ahead, according to English.
But, according to Goldman, the tide is turning.
The reduction in consumer cash flow began abruptly, but the gap between 2021 and 2022 has slowly narrowed. Consumers had 10% less discretionary income available in the first quarter than in the same month a year ago, which Goldman predicts will reduce to a 2.7 percent loss this quarter and a 1.2 percent drop for the holiday season.
Goldman’s cash flow measure adds other sources of cash, such as government transfer payments and borrowing, to current income and subtracts basic expenses, such as food and fuel, to provide a more complete view of consumers’ likely ability and desire to spend.
According to Goldman’s forecasts, the figures will improve throughout the year. Consumer cash flow will increase by 2% in the first quarter and by 6% or more in the second half of 2023, for a total gain of roughly $600 billion.
The biggest winners may be the big box merchants.
While the increase in consumer income is excellent news for the economy, it may not benefit all firms equally, according to CFRA Research analyst Arun Sundaram, who believes the increase will benefit big merchants the most. He believes that large-scale firms like Amazon, Walmart, and, to a lesser extent, Target will win and gain market share.
Even if retail conditions recover, this year’s weak retail conditions may prevent smaller consumer enterprises from accessing capital markets that have become more restrictive. Sundaram believes they should have raised funds a year ago. “Markets are now tighter… They are attempting to minimize costs and reduce their cash burn.”
While Sundaram was focusing on consumer startups that went public in recent years, such as Oatly and Beyond Meat, the mood among America’s broader small business community is not upbeat, with inflation continuing to wreak havoc on Main Street’s ability to maintain margins in the face of rising input prices, from raw materials to energy, transportation, and labor. According to the latest CNBC|SurveyMonkey Small Business Survey for Q3 2022, which saw small business confidence hit an all-time low, most small business owners believe a recession is unavoidable; in fact, some believe the recession has already begun and have reduced their sales outlook for the next year.
Meanwhile, Walmart, which had cut second-quarter profit targets but then beat them on August 16, devoted much of its second-quarter earnings call to explaining its investment plans, which chief financial officer John David Rainey said will be one source of the chain’s hopes to boost profitability in the coming year.
Walmart increased capital spending by 50% in the first half of its fiscal year, which ends in January, to $7.5 billion. Target, which saw its second-quarter earnings collapse by 90%, virtually doubled its investment to $2.52 billion from $1.34 billion. In a conference call with analysts following its earnings, Walmart CFO John Rainey emphasized the company’s investment in automation and technology, and how it will continue to assist create better efficiency. He cited the company’s augmented-reality Viz Pick technology, which leverages employees’ cell phones to speed up shelf replenishment and reduce wasted sales.
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Before the expected increase in customer income, retailers must navigate the back-to-school and holiday shopping seasons, when household income will be slightly lower than in 2021 and retailers will still be dealing with excess inventory of home-related goods that they have been marking down and writing off.
“If we’re cleared by the holidays, we’ll be in much better shape than the market currently expects,” English added.