(Bloomberg Opinion) — Target Corp sales decline The latest quarter marked the latest example of the supposed softening of US consumption, leaving some stock market investors concerned that a recession may still be in the cards. But a slight moderation in demand — along with increased competition among firms — may be just what policymakers need to tame inflation and set the stage for more sustainable growth.
With about 97.1% of companies reporting by market cap, the S&P 500's earnings per share rose about 5.9% in the first quarter from a year ago on revenue growth of about 4.3% – a distinctly positive result in generally. However, companies appear to be competing more for the same top-line growth pool, a development that ultimately benefits consumers and requires investors to be more cautious.
Only 296 of the S&P 500 companies increased sales from a year ago, marking some of the weakest sales breadth since 2020, according to Bloomberg Intelligence data. But these numbers are not terrible or recessionary from a historical point of view; they're just not up to par with the “everyone wins” stock market we're used to. Even within the same industries and product categories, some firms are doing much better than others in food for changing tastes, marketing and selective discounting to capture market share.
For example, consumers seem tired of Starbucks Corp.'s coffee, but they're as hungry as ever for Chipotle Mexican Grill Inc.'s chicken pastor. Target is struggling with declining same-store sales, but Walmart Inc. is using its “everyday values” reputation to lure more higher-income customers. And in travel, Booking Holdings Inc. had an excellent quarter; Airbnb Inc. did so (and offered a tepid perspective); and Expedia Group Inc. it was completely disappointing.
That's how it should work. From 2021-2023, companies took advantage of relatively wild consumers to drive price increases, many justified by higher input costs – and some not. But as savings accounts return to normal, companies are thinking long and hard about market share, not just price. Many economic Cassandras pointed to Starbucks' recent sales slump as evidence that the consumer is cracking. In fact, I suspect customers are simply tired of his 1990s vision of the coffee shop experience.
Anecdotes always have the potential to mislead us, but this is especially true in the pandemic and post-pandemic era. The composition of spending has been constantly in flux, with demand for goods exploding in 2020-2021 before passing the baton to discretionary services such as concerts and sporting events. Both of these categories have benefited from the fact that many homeowners are locked into extremely low mortgage payments before 2022, limiting their housing costs as a percentage of disposable income. But the spending mix could change again if the housing market melts and homebuyers decide to reallocate concert ticket budgets to help them buy a new McMansion.
No, the economy is not perfect and, yes, some families are suffering, including many young people.
Federal Reserve Bank of New York Quarterly report on Household Debt and Credit showed that 9.9% of 18-29-year-olds' credit card debt went into serious delinquency in the first quarter, the highest since 2010. Likewise, 4.9% of their auto loans did the same, the highest since 2009. Then again, total the transition to serious delinquency was only 2.4% for the 18-29 age group, thanks to low levels of housing distress and, to some extent, student loan forgiveness. Across all age groups and product categories, transitions to serious delinquency were just 1.5% – still well below pre-pandemic rates. In a world experiencing tectonic shifts in consumer spending habits, it's important to focus on big picture and take hyper-specific “cracks” with a grain of salt.
In this sense, current developments in the retail and consumer services landscape are largely in line with what you would hope and expect. Consumption is not growing and most consumers are not on the brink of financial disaster; they're just getting pickier and forcing companies to fight for their business. An example: Target says it's slashing prices on 5,000 popular items. This indicates that price pressures may continue to ease, hopefully in time for a surgical policy rate cut later in the year. As long as that happens, easier borrowing conditions will come in plenty of time to keep consumption growing and the US economy humming.
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