People still appear willing to shell out to travel, go to the movies and have a drink or two, even as surging prices and fears of a recession have them pulling back in other areas.
How
people spend their money is shifting as the economy slows and inflation pushes
prices higher everywhere including gas stations, grocery stores and luxury
retail shops. The housing market, for example, is already feeling the pinch.
Other industries have long been considered recession proof and may even be
enjoying a bump as people start going out again after hunkering down during the
pandemic.
Still, shoppers everywhere are feeling
pressured. In May, an inflation metric that tracks prices on a wide range of
goods and services jumped 8.6% from a year ago, the biggest jump since 1981. Consumers’ optimism about their
finances and the overall economy sentiment fell to 50.2% in June, its lowest
recorded level, according to the University of Michigan’s monthly index.
As
gas and food prices climb, Brigette Engler, an artist based in New York City,
said she’s driving to her second home upstate less often and cutting back on
eating out.
“Twenty
dollars seems extravagant at this point for lunch,” she said.
Here’s
a look at how different sectors are faring in the slowing economy.
Movies, experiences
holding up
Concerts,
movies, travel and other experiences people missed during the height of the
pandemic are among the industries enjoying strong demand.
Live
Nation Entertainment,
which owns concert venues and Ticketmaster, hasn’t seen people’s interest in
attending concerts wane yet, CEO Joe Berchtold said at the William Blair Growth
Stock Conference earlier this month.
In
movie theaters, blockbusters like “Jurassic
World: Dominion” and “Top
Gun: Maverick” have also pulled in strong box office sales. The movie industry long been
considered “recession proof,” since people who give up on pricier vacations or
recurring Netflix subscriptions can often still afford movie tickets to escape
for a few hours.
Alcohol
is another category that’s generally protected from economic downturns, and
people are going out to bars again after drinking more at home during the early
days of the pandemic. Even as brewers, distillers and winemakers raise prices,
companies are betting that people are willing to pay more for better-quality
alcohol.
“Consumers
continue to trade up, not down,” Molson Coors Beverage CEO Gavin
Hattersley said on the company’s earnings call in early May. It might seem
counterintuitive, but he said the trend is in line with recent economic
downturns.
Alcohol
sales have also been shielded in part because prices haven’t been rising as quickly
as prices for other goods. In May, alcohol prices were up roughly 4% from a
year ago, compared with the 8.6% jump for overall consumer price index.
Big
airlines like Delta, American and United are also
forecasting a return
to profitability thanks to a surge in travel demand. Consumers
have largely digested higher fares, helping airlines cover the soaring cost of
fuel and other expenses, although domestic
bookings have dipped in the last two months.
It
isn’t clear whether the race back to the skies will continue after the spring
and summer travel rushes. Business travel usually picks up in the fall, but
airlines might not be able to count on that as some companies look for ways to
curb expenses and even announce layoffs.
People’s
desire to get out and socialize again is also boosting products like lipstick
and high heels that were put away during the pandemic. That recently helped
sales at retailers including Macy’s and Ulta Beauty, which last
month boosted their full-year profit forecasts.
Luxury
brands such as Chanel and Gucci are also proving to be more resilient, with
wealthier Americans not as affected by climbing prices in recent months. Their
challenges have been more concentrated in China of late, where pandemic
restrictions persist.
But
the fear is that this dynamic could change quickly, and these retailers’
short-term gains could evaporate. More than eight in 10 U.S consumers are
planning to make changes to pull back on their spending in the next three to
six months, according to a survey from NPD Group, a consumer research firm.
“There
is a tug-of-war between the consumer’s desire to buy what they want and the
need to make concessions based on the higher prices hitting their wallets,”
said Marshal Cohen, chief retail industry advisor for NPD.
Homes, big-ticket items
squeezed
The
once red-hot housing market is among those clearly hurting from the slowdown.
Rising interest
rates have dampened mortgage demand, which is now roughly half
of what it was a year ago. Homebuilder sentiment has dropped to the lowest
level in two years after falling for six consecutive months. Real estate firms Redfin and Compass
both announced layoffs earlier this week.
“With
May demand 17% below expectations, we don’t have enough work for our agents and
support staff,” Redfin CEO Glenn Kelman wrote in an email to employees later
posted on the company’s website.
For
the retail sector more broadly, data from the Commerce Department also showed a
surprising 0.3% drop in overall in May from the previous month. That included
declines at online retailers and miscellaneous store retailers such as florists
and office suppliers.
And
while demand for new and used cars remains strong, auto industry executives are
starting to see signs of potential trouble. With the cost for new and used
vehicles up by double digits over the last year, car and other motor vehicle
dealers saw sales decline 4% decline in May from the previous month, according
to the U.S. Department of Commerce.
Ford Motor CFO John
Lawler said this week that delinquencies on car loans are starting to tick up
too. Although the increase could signal tough times ahead, he said said it’s
not yet a worry, since delinquencies had been low.
“It
seems like we’re reverting back more towards the mean,” Lawler said at a
Deutsche Bank conference.
The
restaurant industry is also seeing signs of potential trouble, although how
eateries are affected could vary.
Fast-food
chains have also traditionally fared better in economic downturns since they’re
more affordable and draw diners with promotional deals. Some restaurant
companies are also betting people will keep dining out as long as grocery
prices rise faster.
The
cost of food away from home rose 7.4% over the 12 months ended in May, but prices
for food at home climbed even faster, shooting up 11.9%, according to the
Bureau of Labor Statistics. Restaurant Brands International CEO Jose
Cil and Wendy’s CEO Todd Penegor are among the fast-food executives who have
emphasized the gap as an advantage for the industry.
But McDonald’s CEO
Chris Kempczinski said in early May that low-income consumers have started
ordering cheaper items or shrinking the size of their orders. As the largest
U.S. restaurant chain by sales, it’s often seen as a bellwether for the
industry.
On
top of that, traffic across the broader restaurant industry slowed to its
lowest point of the year in the first week of June, according to market
research firm Black Box Intelligence. That was after the number of visits also
slowed in May, though sales ticked up 0.7% on higher spending per visit.
Barclays
analyst Jeffrey Bernstein also said in a research note on Friday that
restaurants are accelerating discounting, a sign that they’re expecting
same-store sales growth to slow. Among the chains that have introduced new
deals to draw diners are Domino’s Pizza, which is offering half-price
pizzas, and Wendy’s,
which brought back its $5 Biggie Bag meal.
Among
those scrambling to adjust to a shift in shopper behavior are mass-merchant
retailers like Target and Walmart, which issued cautious guidance for the year
ahead.
Target
warned investors earlier this month that its fiscal
second-quarter profits would take a hit as it discounts people bought up during
the pandemic but no longer want, such as small appliances and electronics. The
big-box retailer is trying to make room on its shelves for the products in
demand now: beauty products, household essentials and back-to-school supplies.
CEO
Brian Cornell told CNBC that the company’s stores and website are still seeing
strong traffic and “a very resilient customer” overall, despite the shift in
their buying preferences. Rival Walmart has also been discounting
less-desired items like apparel, although the retail giant said it’s
been gaining share in grocery as shoppers look to save.
Source: Inc