Navigating Retail's Future: Insights from Mark Matthews on Consumer Sentiment and Spending Trends

In this episode of The Voice of Retail podcast, Tim Phelan discusses the current state of the retail industry with Mark Matthews, Executive Director of Research at the National Retail Federation. They explore the economic landscape, consumer behavior, and employment trends, while also forecasting holiday sales and discussing strategies for retailers in a competitive market. The conversation highlights the resilience of the retail sector and the importance of understanding consumer sentiment and spending patterns in the face of economic challenges.

The Connecticut Retail Network is The Voice of Retail, at the State Capitol and across the state. Our podcast features timely conversations about retail topics and trends, with retail industry leaders and business owners from throughout the state. It’s a podcast for retailers – and their customers! To learn more about us please visit https://ctretailnetwork.com/

Chapters

• 0:00 Introduction to the Retail Landscape
• 2:26 Economic Overview and Consumer Behavior
• 10:15 Inflation and Its Impact on Spending
• 15:48 Consumer Sentiment and Spending Trends
• 21:48 Employment Trends and Economic Outlook
• 27:10 Holiday Sales Forecast and Consumer Expectations

Transcript

Tim Phelan (00:04.342)

Welcome to the Voice of Retail, the podcast of the Connecticut Retail Network. I'm Tim Fallon, president of the Connecticut Retail Network and your host for this podcast. We're looking forward to providing insight into the retail industry in Connecticut from the perspective of retailers, retail customers, and we're glad you've joined us for this podcast. The retail industry is the nation's largest private sector employer, contributing $5.3 trillion

annually to our GDP and supporting more than one in four U.S. jobs, 55 million working Americans. The Connecticut Retail Network represents the retail industry in the state of Connecticut, an industry that supports more than 470,000 jobs and contributes more than $34 billion to our state's economy. 24 % of the jobs in Connecticut, nearly one in four, are supported by the retail industry, and more than 98 % of all retail companies

are small businesses employing fewer than 50 people. The Connecticut Retail Network is the voice of retail at the state capital and across the state. Our podcast will feature timely conversations about retail topics and trends with retail industry leaders and business owners from throughout the state. It's a podcast for retailers and their customers. Retail businesses are everywhere in Connecticut. They are small and large, local and national.

in large cities and small towns. New retail businesses continue to emerge and longstanding retailers achieve milestones of longevity each and every year. It's an industry that sees near constant change and is resilient and responsive. For many people, retail was their first job. And for many others, retail is your career. So we look forward to having discussions like we're gonna have this morning and we welcome your suggestions. If there's any retail comp,

topic you'd like to hear more about. And after the podcast, to learn more about the Connecticut retail industry, visit our website, ctretail.com. And you could send us an email with your ideas for future podcasts. Today, our guest is Mark Matthews. Mark is the Executive Director of Research at the National Retail Federation. In this role, Mark is responsible for leading the research department at NRF. Mark.

Tim Phelan (02:25.806)

Mr. Matthews has spent more than 30 years working in research in a variety of roles in the United States and in the United Kingdom. Most recently, he headed the Market Intelligence Group at the World Gold Council, where he served as a member of the organization's leadership team. Prior to working for the World Gold Council, Mr. Matthews spent seven years working for 1.4 billion AUM private equity firm based in London. As a principal in the firm,

Mr. Matthews ran the research team responsible for generating investment ideas and opportunities. In his time there, Mr. Matthews worked on dozens of deals in the retail sector, including acquisitions in the food service, entertainment, consumer goods, and in internet retail sectors. Mr. Matthews has been a guest of ours before having been our featured speaker at our 2023 annual big show or our version of the big show, the big fall event.

And we're very happy and thrilled that he's back with us again this year for this podcast. So welcome, Mark. It's great to have you back again. Thank you so much, Tim. I really appreciate the invite and great to be talking with you again. I will say that after last year's fall event, which you were our speaker, had a lot of folks talking about how informative and really helpful the presentation you gave. So we were eager to get you back in time.

as we sort of end the summer and start looking towards the fall to talk about what's taking place in not only the national and global retail, but maybe a little bit of what's taking place locally here in Connecticut. So overall, let's get started. What's your view of the economy as we sit here today? You know, it's really challenging to look at the economy right now and try to understand where it's headed.

The chances, I believe, of a soft landing are certainly elevated from where they were before. But we definitely seem to be at a bit of a crossroads. Data just this morning shows that job growth was actually a lot weaker than we thought it would be. And what's been really interesting is, as the Fed has raised rates, the expectation was that that would have an impact on jobs.

Tim Phelan (04:47.138)

That's the key to raising rates. You want to slow down the economy. And there is a relationship between raising rates and creating unemployment. And we hadn't really seen that. And this is the first time we're beginning to see some real weakness in the jobs market. So the question is, has the Fed played their cards right? As I'm sure everybody knows, they chose not to lower rates at their most recent reading.

the expectations that they'll lower rates in September when they meet again. And the question is, is that a little bit late or is that right on time? So we're in that sort of an area of an inflection where we're still not sure whether we're assured a soft landing. But if you look at the consumer, the consumer still seems to be in a relatively good position.

and is driving our economy. 70 % of GDP is consumer expenditures. And we're still seeing spending in the retail space, although there is a little bit of softening that we're seeing lately. Let's just go back to the Fed. I know you mentioned they're going to meet in September. There's obviously lots of chatter and some pressure on the Fed to cut rates. And you touched on a little bit, but you think they will cut overall cut rates to try to?

as a reaction, especially if the jobs report, as you mentioned today, shows slowing in employment, that they perhaps that might spur them to cut those rates. And if they do cut rates, what do you think it'll look like? Yeah, so, you know, the reason that they didn't cut rates this time, according to them, was they wanted to see more data. And they wanted to see things like this job revision and see where it came in. So,

They've been taking a wait-see approach. I think the preponderance of data that we've seen so far indicates that they probably should cut rates. And the expectation in most markets is that they are probably a 25 basis point cut. But you just never know because there is still conflicting data out there. Second quarter GDP grew faster than anybody expected. First quarter was revised up. Now, first quarter was weak.

Tim Phelan (07:09.826)

But the second quarter was solid. And we forecast retail sales to grow between 2 and 1 half to 3 and 1 percent. We're sort of towards the upper end of that range. consumers have been spending. They're spending in different ways than they have. But the Fed has to look at all this data, the employment data, the GDP data, the spending data. And

determine whether or not they believe a right cut is not just the right thing to do, but the right signal to send, right? Because it's important to understand that a 25 basis point cut in and of itself isn't going to have a dramatic impact on the economy. It's really about the signal that it sends to the markets and everyone else that they are going to take a softening stance moving forward. Last week, we did a pod.

with Matt Shea, your boss at the NRF, had a great conversation with Matt. And he had sort of indicated that he didn't think we were gonna kind of go into recession, that the data that he was looking at, which I presume some of it was provided by you and others, that maybe we would have a, we would in fact have a soft landing. Some other folks have said, I think it was Brian Monahan from the Bank of America had mentioned,

you know, we wouldn't have that, you know, inflationary or recessionary trend. What's your take on all of that? You think we're gonna have a soft landing has happened? You think we've kind of missed the opportunity to have that, you know, recession that we all feared? Yeah, the thing is that if you look at it as at a point in time, if you look at the data as of right now,

you're probably feeling pretty confident, right? Unemployment, it's risen, but it's not too bad. Debt has risen, but again, we're at very high levels, but it remains affordable because the debt service payments as a percentage of disposable income remain low. So if you look at most things as of right now, you're OK with where they are. What's concerning is the trend, right? So we see, know what I'm talking about, debt.

Tim Phelan (09:24.898)

We see the number of people defaulting on debt rising. We see unemployment rising. So we see a lot of things that are headed in a not very good direction. The question is, is that a return to normal and it's going to level off, or is it going to continue to increase? And that's the challenge again for the Fed, to make sure that as these things start trending in the wrong direction, that they start taking measures to

you know, ease the economy and bring back some ability to spend in the economy. You know, in answer to your question, you know, I'm with Matt on that one. I think we both agree that the likelihood is for a soft landing. The likelihood is that the consumer remains in a strong enough position that they will continue to spend us out of trouble. But the one concern that I have is that

If you think about what's funding the spending, right? During the pandemic, we had a lot of excess savings that were built up because people weren't spending as much, many, many trillions of dollars because the government pumped a lot of money into the economy. That for the most part is gone now. So what's funding the spending are a couple of things. Wages have been increasing faster than inflation. So we have real wage growth, which is really great.

You know, as long as wages continue to grow, we're not in bad shape because inflation has been softening. The other thing to think about is that, you know, we have, as I mentioned, we have a situation where consumers continue to have the ability to spend money on things because inflation is continuing to fall. So... Not all factors have...

inflation fall. The groceries, food is still high. You go out to a restaurant, you're buying it, you're spending, right? So some areas have come down, but other areas remain consistently high. Is that right? It's a great point, Tim. And yeah, I think when I talk to most people, unlike you, they don't really get inflation, right?

Tim Phelan (11:45.184)

I think the average- I'm not sure I get it either. The average American is saying, why are telling me that inflation is slowing down when prices seem really high? What we discover is that most Americans think about prices not in a year over year way like the Bureau of Labor Statistics. They're thinking about what I paid five years ago, what I paid four years ago for milk.

And you you're paying probably 30 % more for a lot of things than you were three or four years ago. So yes, inflation is slowing down, but that doesn't mean that prices are decreasing. Now it gets more complicated because you really need to separate out items, right? So if you separate goods from services, most goods categories are flat to negative. Most of the inflation that we're seeing right now is in the services area.

and core services are three times the weight of goods. So we spend more on services than we do on goods. So inflation in services is much more damaging for the pocketbook. So if you think about things like electronics, home furnishings, furniture, appliances, all of those are actually in deflation. We're seeing falling prices in those areas.

but that is being compensated for by higher prices in food. We still see inflation in food about 1 % in groceries, about probably 3 or 4 % in restaurants. So there is definitely a lot of inflation out there and potentially more to come even though we see a softening of the overall trend. Yeah, we can get really nerded out about the economy. I don't want to do that because it could get over my head as well.

But you did mention things like household purchases, appliances, furniture, things like that. Those prices have gone down. How much is that due to the supply chain sort of getting back to pre-pandemic levels, right? Because I think you taught us that last year's big fall, that the big reason for price increases and inflationary activity was because supply chains were all messed up during the pandemic, but they've improved since that. You talk a little bit about-

Tim Phelan (13:59.33)

about supply chains and how that factors into pricing and behavior by consumers. Absolutely. there's a couple of things. So supply chains absolutely were a cause of inflation, but we also had demand-led inflation because the government...

essentially pumped $10 trillion into the economy, both in monetary and fiscal policy. So people had money in their pockets to spend. Correct, correct, which exacerbated the problem, right? So you have weaker supply and higher demand. that is going to drive prices high. So it's funny when I see people blame the president for inflation. I don't think there is very much the

that the president could have done on inflation. It's really about market forces, right? And we didn't know, nobody knew how the pandemic would pan out. made sense to provide people money, but you can certainly look back and say, well, maybe they juiced it a little bit too much. Maybe the Fed kept rates too low for too long, but that's all sort of hindsight, right? So I mean,

If we look forward, again, we're in a situation where inflation seems to be softening, but it's not quite where the Fed wants it to be. The Fed would prefer 2 % where closer to 3%. So the question for the Fed is, are they going to be OK with inflation at the high 2s instead of the low 2s or the high 1s?

if their mission is to get a debt back down to 2%, that's gonna be a challenge, right? And that means maybe you don't lower rates because they definitely have been concerned about inflation for a long time now. So all of this is great information, but really for retailers, what does it mean? It means how do consumers behave given all these different factors. And so in your research, have you seen

Tim Phelan (16:08.204)

Yeah, I we talked a little bit about consumer behavior. Can you get into that a little bit more? We just mentioned wages are still remaining fairly high, although as we say, some prices are also high. So that's kind of balancing it out. But what about employment numbers and what about overall consumer sentiment? Where do you think consumers are today and where do think they're going to be in another couple of months or three months as we get closer to the holiday season? Yeah, great question.

I'm gonna say something a little bit crazy here. And that is don't pay any attention to consumer sentiment because during the pandemic, it just became completely dislocated from the financial reality and the economic reality. If you think about the relationship between sentiment and economic variables, you have a very strong relationship up until the pandemic. And then suddenly, everyone started feeling bad about everything.

And consumer sentiment has been very, very low, even though the economy has been performing really well. So, you know, I think right now we don't have to think too much about what the consumer is feeling because the consumer has been spending despite complaining. And much of those are because inflation, right? Inflation was making people feel, you know, really poorly about their economic situation.

I have some hope that as inflation softens, that people are gonna start feeling a little bit better about themselves. But the problem, as I mentioned before, is that inflation, their perspective on inflation is what I paid five years ago versus what I'm paying today. And therefore, even if inflation is softening and even inflation is negative in lot of goods categories, it still feels higher than what you were paying before.

Yeah, because you go to the grocery store to buy food and you're paying a lot. And that's a big, know, slapping, you know, across the head sort of thing. You know, you buy a furniture or you buy an appliance. That's a one time purchase maybe once every, you know, two or three years. But you go to the grocery store every week. You go out to dinner once a week and that stays on top of mind. That's why, right? Isn't that why most consumers are kind of like inflation's out of control?

Tim Phelan (18:29.682)

Exactly. Exactly. And it is perception. I think what the consumer isn't paying as much attention to is the fact that their wages have been rising. Well, good point. In line with inflation. So what happens is at the end of the month, the consumer actually still has money to spend. And that's what we're seeing in the economy. We're seeing a slowdown, but we're not seeing a stop. We're still seeing growth in spending because the consumer has the ability to spend.

So they're spending what's in their bank accounts, but they're feeling bad about it because inflation is so high and they see these high prices. But you're asking about what does it mean for retail as we look forward. I mentioned before, we forecast two, two and a half to three and a half percent. We're probably going to see something in that range for the year. And that's really a return to normal. If you look at the 10 years pre-pandemic, the average growth in retail was 3.6%.

So we'll probably get something in that neighborhood. And what that means is that we no longer have a rising tide, floating all boats like we had in 2021 and 2022 when retail grew dramatically because the consumer had a lot of money to spend. We are back to a highly, highly competitive situation now where there are going to be winners and there are going to be losers. And the consumer is changing the way they spend. We're seeing much less spend in discretionary categories.

and much more focus on essentials. We're seeing much more focus on price. If you are the low cost provider right now, you're gonna be in a much better situation than people who are in that middle range. So when we look at Wall Street, we see the earnings announcements. There are hits and misses all over the place. But if you pay careful attention, it's understandable, right? If you're selling furniture and furnishings, that's much more challenging than if you're selling an essential item.

at a low price, you're probably doing okay. So the consumer is protecting the money that they have. They're focused on essential spending as opposed to discretionary spending. And they're gonna reward the retailers that they give them what they want and what they need. Kind of the return to value shopper, person's gonna be looking around. absolutely.

Tim Phelan (20:51.274)

Absolutely well put. The one thing I want to touch on is we've seen in the recent political race talk about price gouging and stuff like that. I've published a couple of blogs on pricing. It's on the NRIF website if anybody wants to check it out. The data shows that there is absolutely no way that retailers have been price gouging. It is too.

highly competitive in industry. Brian Cornell of Target was on CNBC this morning and talking about how this is a penny business. And that's absolutely the case. It's a low margin business. And if you look at the data, if you look at gross margins, if you look at profit margins, and I have all the data in these blogs, we are back in line with where we were pre-pandemic in terms of gross margins, in terms of profit margins.

We saw some movement during the pandemic, but that's response to market forces and nothing else. So I think it's absolutely ludicrous that anybody thinks in this day and age with a price discovery that we have, the ability to find prices on anything at any time and buy anywhere at any time, that the consumer is going to have the wool pulled over their eyes by retailers. No, the consumer is king and the consumer is more king than they ever were. Yeah.

Great point. Can we just talk a little bit about employment? Obviously, employment is a key component to consumer behavior. If people are working and their jobs, then they're going to hopefully spend money in retail shops, that discretionary money. You talked a little bit about a report that came out this morning that showed a slowing of employment. Can you expand on that a little bit?

Yeah, so non-farm payrolls were revised back by about 800,000. So essentially, when all our statistical agencies put out data, their best guess, their estimates, and then more data comes in and they adjust and revise. So basically, what this says is that our employment growth has not been as robust as it might have seemed.

Tim Phelan (23:06.03)

But are we measuring that against something that was artificially high anyways? In other words, we comparing against the mark that may not be attainable quarter after quarter? Yeah, if you think about unemployment, for example, we're just over 4 % unemployment now. That is relatively normal in terms of historical records. But if we go back to what I was saying to you about the

the exact point of data right now, call it 4.1 % unemployment, that's not worrisome. It's the fact that we've gone from just over 3 % to 4 % right now, that trend is worrisome. So the question is that good? The trend, yeah. And the thing that gave us and me a lot of comfort during the pandemic or when the Fed started raising rates during the inflationary period,

is that we had a lot of job openings, over a million job openings in retail. So what it appears that retailers were able to do was instead of getting rid of people, they're able to say, okay, we're just not gonna fill those jobs. So we've seen job openings come down dramatically, but not much impact on the employment market. What we're beginning to see now is, those employment, those job openings have decreased.

we're also beginning to see unemployment increase as well. So companies are letting people go. And that really is, like I said, that's what the Fed was trying to do. The Fed was trying to destroy demand. And that's what you do when you raise rates. And one of the ways you destroy demand is you increase unemployment so people can spend less in the economy. So we are in a position where we probably expect it to be. It's taken longer to get there.

And the only question is, you know, the economy is like an aircraft carrier, right? You know, headed towards the cliff. Have they started that turn early enough, right? It takes a little while, right? Exactly. It takes a little while to turn it around. There are always other factors in trying to predict the economy and where it's going to move, as you mentioned. And one of those, of course, is the election.

Tim Phelan (25:22.19)

We have a presidential election coming up and then the other are factors that are unknown from overseas, things that take place whether in this case. So any thoughts on either one of those two topics? Well, there is no doubt that come middle of November, 40 % of the US is going to be really unhappy and the other 40 % is going to be really happy. Yeah.

You know, I think, you but do consumers hold back? Do they hold back during it during that period of time? Well, they said that was often mentioned. It was like, well, we got a presidential election coming up and and, you know, we got to kind of consumers are kind of pulling back to see what happens. Is that real? Yeah, I haven't seen anything that really convinces me that that's an issue. I mean, a lot of people say actually an election year or, you know, the the markets do.

pretty well because the government is very careful to make sure that things don't go bad in election year. But that's probably giving them too much credit for control over an economy that is very, very difficult to control. I think really, does it play a part in the consumer psyche? Yes, absolutely. But I think much more important are the real things. Like, my paycheck increasing?

Am I growing my income faster than I'm growing my outgoings? What's happening with my credit card debt? Am I able to pay that down? That really expensive automobile that I paid a lot of money for during the pandemic because cars were overpriced, are those payments beginning to weigh on me? All those things I think are much more important factors in terms of where the consumer is spending as we move forward.

But I think when we hit the holidays, everything goes out the window, right? Because that sentiment, that notion that we have to buy gifts for our loved ones, that sort of takes hold. Yeah, Christmas comes every year. you got to... certainly does. We're coming towards the end of our time, Mark. So I just wanted to thank you again for doing this. It's really helpful. It's good information and we really enjoy having you. Just want to, if we can't summarize overall, you think...

Tim Phelan (27:40.942)

We're on a path for the holiday sales at the end of the year to be about around two and a half, 3 % growth over the previous year. Is that about right? Yeah. So we forecast two and a half to three and a half. It looks to me like we're going to be closer to the high end of that range. Yeah. Where we are now. And consumers haven't burned through all of their savings and haven't gotten completely over their head in debt since the last time we talked, but they are, they are

eating into savings a little bit and their credit card debt is going up a little bit from where we were last year. Yeah, so most savings are spent down. And what's interesting is actually the consumer is not saving as much money as they were pre pandemic. So pre pandemic, know, we're looking at between seven to nine percent savings as a percentage of disposable income. We're between three to four percent right now.

And that's one of the things that's funding the expenditures and funding all the spending that we see continuing to go on. But the question is, as we move forward, if the psyche starts taking hold that things are bad, then immediately consumers will probably say, OK, I need to save. I need to increase my savings account. So it wouldn't surprise me if we're in a position where people

say, hey, I need to pull back a little bit. I need to save a little bit more. And again, that's the problem for the Fed, right? Because these things happen really quickly and it's like dominoes, one thing knocking over another. it's that real, real challenge to get the soft landing that everyone's hoping for. And again, hence the consumer maybe looking for value again and maybe not just so free to.

you know, not necessarily consider value when they're making their purchase. So one thing retailers should prepare for is a consumer, a savvy shopper again, they're gonna be out looking for deals and value and where can I make the best choice this year, unlike maybe last year. Yeah, we're expecting a highly, highly promotional holiday season this year. Right, right. All right, Mark, thanks again. Really appreciate it. Great to have you.

Tim Phelan (29:59.222)

And I can't say that we won't have you again, because we might. Especially as we get near the holiday season, we might ask you to come back. It's always a pleasure, Tim. Thank you so much for having me. All right. Thanks again. And thanks, everyone, for listening. And if you want to like and support our effort, please listen to us on Spotify. Subscribe and like this podcast. Thanks again, Mark. All right. Thanks, Tim. Appreciate it. Bye. Have a good one.