Several indicators point to a strong holiday season, but growth isn’t a given

The news: Several economic indicators are beginning to point in a positive direction for retailers.

• Consumers feel better than they have in several months. US consumer sentiment improved in August and households' near-term inflation expectations fell to an eight-month low, thanks in large measure to declining gasoline prices, per the University of Michigan's consumer sentiment index.
• They’re also making more money. Wages and salaries rose 0.8% in July, the largest gain since February, per the US Labor Department.
• Spending is ticking up. Inflation-adjusted consumer spending increased 0.2% in July after being unchanged in June, according to the US Commerce Department.
• Inflation is slowing. The personal consumption expenditures price index, the US Federal Reserve’s preferred inflation measure, fell 0.1% month-over-month (MoM)—the first decline since the start of the pandemic—due to a sharp drop in energy prices. It rose 0.1% MoM when food and energy are excluded.

Feelin’ alright: Those trend lines are leading some retailers to feel good about the rest of the year.

• Premium furniture retailer Arhaus boosted its full-year revenues outlook to $1.173 billion to $1.193 billion, with net income ranging from $92 million to $98 million given its strong first half.
• Sporting goods retailers Hibbett and Dick’s Sporting Goods both raised their full-year guidance due to improving market conditions.
• Luxury watch company Movado expects its operating income to be at the high end of its previous outlook despite strong foreign exchange headwinds due to the strength of the US dollar.

We’re not out of the woods: But there may be some turbulence ahead.

• Federal Reserve Chair Jerome Powell on Friday gave a pointed speech that signaled the US central bank will likely continue raising interest rates and leave them elevated for some time to stamp out inflation.
• The Fed’s blunt tools could kill the economy’s positive momentum. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said. “These are the unfortunate costs of reducing inflation.”
• Until inflation significantly recedes, retailers such as Kohl’s, Macy’s, and Gap will feel the impact of their lower- and middle-income customers pulling back on discretionary spending.
• On the other hand, as long as interest rates remain high, unprofitable retailers such as Peloton and The RealReal will likely struggle to pivot from hypergrowth models focused on top-line growth to models focused on their bottom lines.

The big takeaway: It’s time for cautious optimism. While there’s no shortage of data points one can point to suggest that the second half of the year should be strong for many retailers, many challenges remain. Consumer sentiment remains far below where it was a year ago, spending has slowed, and any number of factors such as the war in Ukraine could cause gas prices to soar.

Go further: For more on The Era of Uncertainty, read our report here.

This article originally appeared in Insider Intelligence's Retail & Ecommerce Briefing—a daily recap of top stories reshaping the retail industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.

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