the unemployment rate, labor force participation rate, disposable income per capita, average hourly wages, personal savings rate, consumer sentiment, average gas price, federal funds rate, housing starts and home price index – found an even split between factors that are likely to drive retail sales growthand those likely to hinder it. Understanding the impact of these macroeconomic factors on consumer behavior is crucial, especially as the holiday season (always a make-or-break period in retail) approaches. Businesses could be doing everything right – creating and marketing desirable products with a clear market-fit – but if inflation or the housing market is dampening consumers’ spending power, they may struggle to hit their targets. Consumers do find ways to spend in difficult times. During the Great Depression in the 1930s and the Global Financial Crisis in the 2000s, for example, sales of small luxury products like nail polish and lipstick boomed, prompting the term the ‘lipstick index’. While consumers cut back on various forms of discretionary spending in these periods, they still indulged in affordable luxuries, such as lipstick, whichprovided some enjoyment during an otherwise bleak time. To help retailers navigate the next few months, we spoke with Coresight’s head of global research and managing director of data-driven research John Mercer about the firm’s most recent report, US Retail and Consumer Outlook, August 2023, and its key findings related to inflation, the employment rate and the state of the housing market. The state of play One positive take away from the report is that the retail sector has largely retained the gains it made during the Covid-19 pandemic. Pre-pandemic, the two-year growth rate in retail sales averaged 7.4 percent, or just under $300 billion. This jumped dramatically in 2020, 2021 and 2022, and by the end of 2021, the two-year growth rate in retail sales was almost three times its pre-crisis average. Strong nominal sales growth in 2022 compounded those gains, with Coresight estimating that an additional $700 billion in retail spend was embedded in 2022. The pace of growth could slow in the months ahead, however, if consumers shift more of their spending away from goods and back to services. During the pandemic, the long-term trend toward spending on services was interrupted by restrictions on social distancing and fears of exposure to Covid-19, and the bounce back in spending on services in 2022 was not sufficient to revert to the pre-pandemic course. This implies the bounce is still to come, Coresight said, and is one of the reasons the firm is predicting a lackluster next few months for retail sales growth. “We characterize the mix of positives and negatives as a kind of consumer [game of] Chutes and Ladders,” Coresight stated in its report. “US consumers have been advancing on ‘ladders’ such as wage hikes and low unemployment, only to slide down due to factors such as interest-rate hikes and a slowing housingmarket.” Two other ‘ladders’ mentioned in the report are the labor force participation rate – 63.6 percent as of July, up by 0.4 percentage points from the year prior – and average hourly wages, which experienced a 4.2 percent year-over-year increase, to $35.58. While those numbers suggest that consumers have more money to spend, the ‘chutes’, which also include depleted personal savings, paint a more negative picture. How are consumers reacting? Consumers have now consumed 70 percent of their excess pandemic-era savings, with those in the lowest-income quartile doing so faster than others, so it’s not surprising that lower- to middle-income consumers have been more affected than others by the shifts in the economic landscape. “High inflation in necessities has been hitting low- and moderate-income shoppers the most. However, different groups are feeling, or will feel, negative impacts from other factors,” Coresight’s Mercer told Inside Retail. “Interest-rate rises are impacting those refinancing or obtaining new mortgages. Going forward, student loan repayments will impact college graduates, predominantly consumers aged in their late-20s, 30s and 40s (largely Millennials).” Mercer noted that 30.2 percent of federal student debt is held by those aged 25-34, and 38.6 percent is held by those aged 35-49. Meanwhile, housing market weakness has hit the ‘wealth effect’ for homeowners, limiting discretionary spending and hitting home improvement retailers particularly hard. Rather than a complete popping of the retail balloon that expanded during the past three years, however, Coresight is predicting a gentle deflation. “We are likely to see drags on consumer spending in the near term from recent gasoline price rises and interest hikes, and from forthcoming student loan repayments capturing an average $200 per month per payee,” Mercer said. “However, from July 2024, monthly federal student loan payments will be cut from 10 percent to 5 percent of qualifying income, easing the pressure from student debt.” Inflation is now much lower than in the recent past, but it remains elevated in certain categories, such as personal care, home care and some food categories, and Mercer thinks these need to come down before the benefits will flow through to consumer behavior. Coresight data shows that 52.2 percent of consumers who had observed inflation in June reported seeking out promotions and coupons for grocery shopping, and 41.6 percent reported switching to cheaper brands, with 38.6 percent buying fewer items. In non-grocery categories, 48 percent of consumers who had observed inflation reported buying fewer items, compared with 45.2 percent who reported seeking out promotions and coupons. While spending was up 29.7 percent in furniture and homewares, 22.1 percent in clothing and footwear and 70.1 percent in recreational goods and vehicles between January and May this year, compared with the same period in 2019, much of that growth can be attributed to higher prices. Real year-onyear retail sales growth has fluctuated between positive and negative territory over the past 18 months. Looking ahead With this mix of factors, Coresight is projecting low-single-digit nominal retail sales growth in the 2023holiday quarter, thanks to the steady decline in inflation, a favorable holiday calendar and reduced retail inventories. When it comes to surviving and thriving in the current economic environment, there is no singular path to success. “True long-term resilience is built on strong retail brands that maintain a connection and relevance to consumers,” Mercer advised. “Whether cutting prices, cutting costs (and where cost-cuts materialize), or neither best serves a retailer depends on its proposition and market position, and how those intersect with price cuts or cost cuts.” This story first appeared in the September 2023 issue of Inside Retail US magazine.