State of the State Mid-Year 2023: Retailers anticipate slow, but positive growth

Editor’s note: The State of the State series provides reports twice a year on Arkansas’ key economic sectors. The series publishes stories to begin a year and stories in July/August to provide a broad mid-year update on the state’s economy. Link here for the State of the State page and previous stories.

With half of 2023 in the rear view mirror, the retail sector is moving slowly with muted growth predicted for the rest of the year, according to National Retail Federation (NRF) Chief Economist Jack Kleinhenz.

He said retailers and the macro economy did better than expected in the first seven months of this year fending off recession as inflation continues to moderate from record levels in 2022. However, the trade group forecasts growth will slow toward 2024, even if a recession does not happen.

The Business Trends and Outlook Survey of the retail sector conducted by the U.S. Census Bureau in July found 16.2% of the respondents said their performance was “above average” and 6.3% replied business was “excellent” when compared to a year ago. About 45% of the retail businesses reported no change in operating revenue in July, above the 33.1% of respondents to start 2023. About 15% reported increased business operating revenue which was down from 20.5% in January. The survey results indicated a majority of retailer respondents don’t expect consumer demand to return to 2022 or 2021 levels.

Economists are split on the retail sector in the back half of this year. J.P. Morgan’s economic team predicts a mild recession in the fourth quarter or very early in 2024 as student loan payments resume and consumers continue to reduce discretionary spending. Bank of America said it is waiting to see how consumer-centric companies perform in their second-quarter earnings reports over the next few weeks which may highlight a growing, not receding, economy.

Goldman Sachs recently set the odds of a recession in the next 12 months to 20%, down from its previous 25%. The Wall Street firm has been among the most bullish on the chances the economy can achieve a “soft landing” where growth slows but a recession is avoided.

Bentonville-based Walmart said it is positioned well if a recession happens given its growing share of food and consumables sales and overall low-price strategy across all categories. The retail giant has said it’s also resonating with higher-income customers via its growing marketplace assortment. Walmart Chief Financial Officer John Rainey said the retailer is attracting higher-income households who are more focused on prices.

Retailers don’t want to see a recession this year or next. Walmart CEO Doug McMillon said in early 2023 that Walmart would not participate in a recession if there is one. In June, McMillon said he believes Walmart can help bring inflation down as it keeps a lid on the prices of its private labels and works with brand suppliers to get them to do the same.

“Over time, the market works,” McMillon said. “We believe branded manufacturers and all of our suppliers of all types will have to respond to that market in time.”

Consumer spending comprises about 70% of the country’s growth. NRF reported retail sales for the first six months of 2023 rose 4% from last year. The sales are not adjusted for the 3% inflation for all goods through June 2023, compared to the same period last year, according to the U.S. Bureau of Labor Statistics. During the first half of 2022, prices of all goods increased by 9.1%.

While inflation is moderating, Walmart execs have said on a two-year stacked basis prices remain too high in many categories including foods and other consumables. Analysts expect there to be winners and losers in the upcoming earnings cycle that measures the second quarter results and includes several holidays, summer fare and the start of back-to-school.

Neil Saunders, managing director of GlobalData, said halfway through 2023, the retail economy is holding up reasonably well.

“There has been a slowdown in growth and there is pressure on profits and margins. However, a retail recession has been avoided and all the indicators point to more of the same in the second half of the year,” Saunders said. “Consumers are far from depressed, but neither are they in a celebratory mood. An air of caution pervades society and people are still in the mode of being careful about what they buy and trying to stick to set budgets.”

Research firm Algolia said rising credit card debt and the resumption of student loan payments have some consumers tightening their budgets. But household savings remain elevated and the tight job market helps to counterbalance those shopping less.

With near-certain lower margins from retail sales and slower consumer spending in the coming months, analysts with Deloitte expect retailers from Walmart to specialty and dollar stores to continue investing in alternative revenue sources like media/ advertising, health and pet care to bolster bottom lines.