US consumer sentiment, retail sales rise as inflation ebbs

Consumers are holding up: The Commerce Department data underscores the resilience of the US consumer, even as shoppers are more careful—or, in the words of Walmart CFO John David Rainey, more “choiceful, discerning, [and] value-seeking” with their expenditures.

• On a year-over-year (YoY) basis, retail and food service sales were up 2.1% in August, falling slightly short of last month’s 2.5% annual inflation rate.
• Core retail sales—which exclude autos, gas, building materials, and food services—grew 0.3% MoM and were up 5.7% YoY in the last three months, marking the fastest pace of growth since August 2023.

In fact, consumer sentiment in September reached its highest level since May, which Joanne Hsu, director of the University of Michigan’s consumer sentiment survey, credited to “more favorable prices as perceived by consumers” for durable goods.

• However, that increase in sentiment is unevenly distributed, per Deloitte’s financial well-being index.
• It found that higher-income consumers were much more likely to have reported an improvement in their financial situations than lower- and middle-income respondents.

That bifurcation explains the diverging fortunes of Walmart—which is winning over wealthier consumers looking for deals on groceries as well as general merchandise—and discounters like Dollar General and Dollar Tree, both of which recently lowered their full-year forecasts as their core lower-income customers pull back sharply on discretionary purchases.

Implications for the holiday season: Some of that caution is set to carry over into the holiday season, as consumers try to find a balance between covering everyday expenses and shopping for gifts.

• Nearly 60% of US and UK consumers plan to cut back on everyday purchases to prioritize their gift budgets, while cost, value, and budget ranked as their top holiday shopping concern, per a survey by Coveo.
• A separate survey by Bankrate found that 1 in 3 holiday shoppers plan to spend less this year, with a similar proportion (34%) saying that inflation will change the way they shop.
• The desire to save money is also driving holiday creep, as consumers look to lock down deals and spread out their purchases over a longer period of time. Nearly half—48%—plan to start holiday shopping before Halloween, per Bankrate.

Looking ahead: The strong retail sales data backs up our bullish holiday forecast, which expects sales to rise 4.8% YoY in the last two months of the year—with particular strength in ecommerce, which we forecast will grow 9.5% YoY in the same period.

However, it should be noted that there is a degree of uncertainty surrounding consumer spending in the later part of the year given the presidential election’s potential to disrupt sales—which will make October a crucial month for retailers looking to capture shoppers’ dollars.

Go further: Check out our US Holiday Shopping 2024 report.