Consumer Confidence, Tariffs & The Future of Retail

In this episode of the Voice of Retail, Tim Phelan discusses the evolving landscape of Connecticut's retail industry with Mark Matthews, Executive Director of Research at the National Retail Federation. They explore the current economic climate, including inflation and interest rates, consumer behavior and confidence, the impact of tariffs, and the performance of retail post-holiday season. The conversation also touches on government influences on retail and key indicators for measuring economic health.

 Takeaways

·      Connecticut's retail industry supports 470,000 jobs.

·      Inflation affects consumers differently based on their purchases.

·      Consumer confidence has fluctuated but spending remains strong.

·      Tariffs generally act as a tax on consumers and can harm the economy.

·      Retail sales grew by 4% during the holiday season, exceeding expectations.

·      The consumer is currently in a strong financial position but lacks savings.

·      Monitoring wage growth versus inflation is crucial for understanding consumer health.

·      The stock market does not accurately reflect the economy's health.

·      Focus on consumer spending habits to gauge economic trends.

·      Traffic in retail does not equate to sales without conversions.

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

• 2:28 Current Economic Climate: Inflation and Interest Rates
• 7:55 Consumer Behavior and Confidence Trends
• 10:06 Understanding Tariffs and Their Impact
• 15:36 Retail Industry Insights Post-Holiday Season
• 18:49 Retail Monitor and Economic Forecasting
• 20:59 State Government Budgets and Economic Risks
• 22:17 Measuring Economic Health: Key Indicators

Transcript

Tim Plelan (00:00)

Hello and welcome to the Voice of Retail, the podcast from the Connecticut Retail Network. I'm Tim Phelan, president of the network. We're here to shine a spotlight on Connecticut's retail industry, an industry that's vital to our state, supporting 470,000 jobs and contributing to over $34 billion to the economy. Each episode, we'll dive into retail trends, chat with industry leaders, break down legislative updates that affect businesses and customers alike.

Retail in Connecticut is always evolving, driven by resilience, innovation, and the incredible people behind it. Join the conversation, follow us for insights, updates, and the latest in Connecticut retail. And thanks for listening. So let's get into today's episode. First, let me apologize for a little bit of a cold. And I want to introduce our guest, Mark Matthews. Mark is coming off sick bay too. He was out, I think, last week with something. So we're happy he's

back up and joining us.

Some of you may remember Mark. He has done a couple of things with us. He did a presentation at our annual awards dinner back in 2024, and he did a brief video with us last year. So welcome back, Mark. And let me just give everybody a quick little background on you so they know you're the executive director Of research at the National Retail Federation and in this role.

Mr. Matthews is responsible for leading the research department at NRF. He spent more than 30 years working in research in a variety of roles in the United States, in the United Kingdom, and 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. And Mark is a graduate. There's lots of other stuff about Mark, but I want to get into the conversation. Mark is a graduate of Georgetown University.

where he was a double major in finance and economics. He was born in South Korea and has lived in Japan, India, Kenya, Samoa, and the UK, but he's never lived in Connecticut. Have you, I certainly haven't. And thank you so much for having me, Tim. It's great to be back healthy again and in the land of living and thrilled to be able to join you today. All right, great. Let's get into it. This is a fun topic for me. It's kind of dry, I know, for some people, but I think it's

It's really important for folks to understand and for us to kind of get a glimpse of what's really going on in the world of retail. So let's just get started first on a big topic that was in the last election, presidential election, and it was around inflation and the price of eggs and all that other good stuff, interest rates. Tell us, give us a little update. Where are we now with

inflation rates, interest rates, and all the general economic data you may have. Sure. Happy to. And I'll try not to engage in economic doublespeak and bore your listeners. But when it comes to inflation, very important to remember that people experience inflation in different ways. My rate of inflation is not going to be the same as your rate of inflation.

because we buy different things and each different thing has a different rate of inflation. So if you're buying a lot of eggs right now, you're probably your bills are going up. I don't eat eggs. So I'm a little bit insulated from that. But, you know, the overall inflation rate, BLS CPI figure up 0.5 % in January. I think people were a little bit disconcerted by that, a little bit hotter than we'd like to see.

because it means the Fed has their hands tied when it comes to easing in the immediate future. So I think it's a bit of a challenge, but it's very worth mentioning that most of the inflation that we're seeing in the economy is on the services side. On the good side, we are not seeing a lot of inflation. We're actually seeing deflation in many, categories in the good sides. Overall for commodities, actually deflation year over year.

So while in food and things like eggs, are definitely seeing inflation. We're actually seeing inflation creep back in apparel as well. home furnishings, major appliances, electronics, all of those are in deflation, which actually creates an issue for retailers, right? Because to do better than you did last year, you've got to actually sell more. Why is it deflation in those areas, Mark? Was it the supply chain, which initially

created a lot of the inflation combined with of course, know stimulus money has the Improvements in the supply chain led to that deflation in those categories Yeah, you know and you're gonna get a lot of argument here in terms of what what the cause was You know, we tend to take the view that it was Mostly demand driven. Absolutely. There were some supply issues Mostly, you know computer chips for for cars

food categories because of Ukraine-Russia war. But for the most part, when you pump $10 trillion into the economy like the government did, and most people think it was $2 trillion or $3 trillion, no, it was $10 trillion because there was fiscal stimulus and there was monetary stimulus. That has an impact. And we saw retail sales go through the roof in 21 and 22.

because people had a lot of money in their hands. We saw luxury, like mid-level luxury skyrocket because lower income households, they had more money than they'd had in a long time. Now we've seen a lot of that spent down. And we also have to remember that we overpurchased certain things during the pandemic and the life cycle of these items tends to be long, like major appliances and things like that.

There's a replacement factor that there's also you need to think about home sales, right? You know, we're not seeing as much home building We're not seeing as much turnover because mortgage rates are high that drives a lot of purchases for furniture and appliances so lots of different factors coming into play but Like I said, the concerning thing is that on the good side it is a bit more challenged You know the consumer is gonna like it right kids prices aren't rising

But the consumer psyche still feels like prices are rising, right? Because the things that they interact with on a daily basis, grocery, gas, all those things, are definitely continuing to see inflation. You mentioned briefly that you see some inflation in apparel. What's going on there? Yeah, it's a good question because apparel was pretty morbid around 23. We're definitely seeing people

come back into the category. And I think, you know, potentially it's again a replacement issue, right? Because you need to eventually buy new clothes. You know, I have heard, and this is pretty interesting, that some people think that, you know, the ozempic drug category is driving a lot of changes in society because people are losing weight. And what happens when you lose weight? Well, you know, you need to replace your clothes.

You know, people are competing, you know, a growth in restaurants, know, think about dates, you know, a growth in a lot of different kind of dating websites, actually. I've seen a lot of things attributed to the fact that we have a class of people who are, you know, maybe losing a few pounds here and there. Yeah. Wow. That's wild. That's one I haven't thought of that. When we talk about

retail, it's hard not to talk about consumer behavior. Obviously, we've touched a little bit about that. Consumer confidence. Have you measured that recently? Now we've started a new year, Christmas and the holiday season's all behind us. Valentine's Day was just recently behind us. What's your general sense? Where do you think the consumer is today? Are they happy, confident, bullish about the future, or are they kind of retracting a little?

The, you know, in the last year we we've plumbed, you know, some, some pretty low depths in terms of consumer confidence. Some measures have hit all time lows in consumer confidence. had seen that rebounding a little bit. but the last month, you know, we, we saw the numbers take a, take a hit. So we, we tend to be pretty low in terms of confidence, but what I always caution people, is

Don't focus too much on consumer confidence. Don't focus on what they're telling you is in their heads. Focus what's in their wallets. Or what they're doing, right? mean, it's going out, right? Exactly. Because what we saw was during those periods when consumers were very, very negative, they were continuing to spend and spend at record levels. And I think, you

part of the reason that confidence has been low in, know, 22, 23 was in inflation, right? Most people in their lives hadn't experienced inflation like that. And it, you know, it had an impact on people's psyche. And now we have a lot of uncertainty creeping into the scenario with, you know, all the things that are going on on the government front, you know, federal jobs, spending in states.

tariffs, all that is creating a degree of uncertainty and that uncertainty feeds again into people's psyche. It doesn't necessarily mean that we're going to see that reflected in their spending though. Right. Let's talk about that for a little bit. Let's just focus in on tariffs. I think there's so much conversation around tariffs. And I think maybe the first question should be, what's a simple way to understand a tariff and how it would affect a consumer if a tariff is

placed on a product. Yeah. So there is no simple way to understand the impact of tariffs. That's why I got you on. supposed to do this. You know, if you make me sound smarter, if you told me that, you know, I had to justify an outcome for tariffs, I could justify that outcome because there are so many moving pieces and so many different things that happen over time. Right. So it's not just that you're tariffing the goods.

it impacts the entire ecosystem. It impacts in particular currency rates, right? So the country that is doing the tariffing is going to most likely see the value of their currency rise while the country that is being tariffed is gonna see the value of their currency fall. So you see some offsetting there. What we're pretty sure of is that on tariffed goods, you are going to see some inflation.

that may not be countrywide, it may not cross categories, but generally speaking, over the long run, tariffs are a tax on the consumer and they damage the economy. I think that's pretty hard to get away from. I like to think of tariffs as, it's similar to surgery, right? If you're targeted, precise, and you address the issue with pinpoint accuracy,

you can actually do some good with tariffs. But if you take a buzz saw, you risk killing the patient, right? What's the good that you can do with tariffs? Is it retaliatory against the country or the industry that is getting hit with it? I what's the positive outcome? What's the case for tariffs? You know, I think what we're seeing is that it is a policy tool.

the way it's currently being used as a policy tool. And the threat of tariffs is almost as important as the actual implementation of tariffs. We're hoping not to see a lot of tariffs implemented, but I'd be lying if I didn't say that there were inequalities in the way that tariffs are applied across the world. US automobiles have incredibly high tariffs across a lot of countries.

The question you have to ask yourself is those countries that are doing the heavy tariffing, when you look at their economies, you probably wouldn't want to trade economies with those countries, right? We are, you know, one of the best performing economies in the last year, last couple of years, and historically for a while. So part of that is the fact that, you know, we operate an open economy and we allow, you know, cheap goods.

that are efficiently made in other countries to get to the consumer. I think those protectionist economies that we see around the world tend not to be very successful. Right. And placing a tariff would be in a category of being a protectionist economy, right? Yeah. Yeah. And yeah. I again, I think you can do good with tariffs if you are targeted and you have rationale behind your approach.

But if you attack them willy-nilly, it can be problematic for you and problematic for the global economy. So if you put a tariff on aluminum, that means the six pack of beer might go up. Potentially, but you create what we call in economics perverse incentives sometimes when you are tariffing goods. If you think about it, if you are tariffing

apparel and making it really expensive for cheap apparel to come into this country, you are incentivizing apparel factories in the US, which is not necessarily something that we're really good at. you're taking it, you we are near full employment. So where are those employees going to come? They're probably going to come from industries that we, you know, we are more efficient at, you know, or manufacturing areas where we're very good and we're efficient and we excel in terms of our exports.

So, I think you have to be very careful of what you might reap when you enact these tariffs. And just a last point on tariffs is that obviously the president is considering tariffs and we don't know from day to day, month to month, whether a tariff is going to go into place or not, right? I mean, there's no pattern to it, is there? Yeah, I mean, we've seen tariffs

know, lobbed around and not all of them end up being enacted. You know, some of them have been, you know, it's difficult to say, but like I said, you know, if the government believes that, you know, there's an opportunity to enact some policy wins by through the threat of tariffs, you know, that's clearly an approach that they're willing to take. We just have to be careful that

if we follow through that we're not making decisions that are going to negatively impact our own economy and our own population. Right. Right. Let's shift a little bit if we can now, Mark, to retail specific, the retail industry. We're past, as I said, the holiday season. Typically at this time of the year, retailers make decisions about store closures or expansions. We used to always joke with my colleagues in other states that

this is when you find out who really had a good Christmas and who didn't because somebody's not gonna make the turn and they're gonna make decisions about whether or not keep stores open and companies going. So how would you characterize the retail industry now that we're in sort of the end of February and close to the end of the first quarter? Were sales strong in the holiday? Are retailers solid? What's your...

Take on that. Yeah, so we had a stronger than anticipated holiday season. You know, we saw 4 % growth. Historically, if you look at the 10 years pre-pandemic, growth is about 3.6 % for holiday sales. We were expecting something, you know, in that 3.5 % range or below. So it definitely bested our expectations. So the consumer was out there buying.

We saw some softness in January, but that's to be expected. And important that when you're thinking about retail sales, you really need to look at the consumer and the financial condition that the consumer is in. right now, I referenced before, we have low unemployment rates. We have wages exceeding inflation for over two years now.

So wages are growing faster than inflation. We have household net worth at record levels. The consumer has spent down some of the excess savings that they made during the pandemic. So that's gone. The way that I like to think about the consumer is, and I've been referring to them as the bodybuilder consumer, right? It's high productivity, high consumption, lots of momentum.

but very, very lean. There's not a lot of body fat on the consumer in terms of savings, right? So as long as nothing goes wrong, you're gonna see the consumer continue to plow ahead. But if we do run into some softness, if we do run into some challenges, things could turn around pretty quickly because there is not a lot of fat on the US consumer right now. there's no real, another way of saying is there's no real safety net in each consumers.

personal finances or household income, right? I that's correct, right? They're chugging along pretty good, but you know, if they have some air comes out of the tire, they could be in trouble. Right. Yeah. So a lot, like I said, a lot of those savings have been spent down. The savings that were made during the pandemic savings rates are at historical low levels, right? So we are not saving a lot of money. We're spending everything that comes in to maintain the high levels of consumption that we have. So

you know, like I said, if nothing gets in the way, you expect the consumer to continue to power on. you know, our forecast for this year, we haven't put it out yet, but we're pretty bullish about, you know, fundamentally the consumer is in a strong enough position to continue to grow retail sales throughout the course of the year. But there's a lot of risk to that. Yeah. That's it. You you raised a good point about your forecast. Talk a little bit, if you can, about the partnership that the NRF and you have with

CNBC for the monthly retail insights? Yeah, absolutely. So, yeah, we've partnered with Affinity Solutions who have access to hundreds of millions of credit cards and billions of credit card transactions. And every month jointly with CNBC, we put out the retail monitor, which comes out in advance of census and gives us a perspective much earlier.

on what's going on in retail sales. I welcome anyone listening to go to our website, look up retail monitor. We were out ahead of census. We predicted the downturn in January when most of Wall Street was saying that we would see growth. We were almost right on the money in terms of where census came in. So we think it's a really solid indicator and can give some people a pretty.

interesting perspective on what's happening in retail sales. And one of the things that we're hoping to roll out relatively soon is, is state by state data. So give the good folks of Connecticut a chance to see how their sales are stacking up. Yeah, we really look forward to that. I know we've had a couple of conversations with you and with your colleagues in NRF about trying to do a state by state and Connecticut specific one. So that's good, something to keep an eye on.

Well, just go back if we can for just a minute to talk about state governments. And in our case in Connecticut, we have our governor introduced a new two-year budget. And legislative leaders and the governor were very cautious in saying, you know, this was a best case scenario given that the federal dollars that are expected to come in in the various agencies come in. But there is this

wild card that they don't know about. So I don't know. mean, I'm not asking you to make a prediction at all, but I'm just wondering, you know, how do you plan for that? And what is it, what kind of insights or anything do you have around around that and how that might impact the economy? Yeah, it's a great question, Tim. It's definitely something that we see on the horizon, you know, all the stuff that's going on in Washington, D.C. has

a real potential to impact consumers across the country. When we make our forecasts, we don't roll that risk into our forecast. We are fundamentally looking at what is now and what is in the past. What happens in the future is really difficult to predict, but there is definitely some risk. And as I mentioned, this notion of the consumer without a lot of fat on them,

You know, you can very, very quickly make the case that you have a cascading set of negative outcomes that create real problems, you know, both at the state level and the national level. You know, you just need, a few things to start going wrong. Inflation is something that we have to keep our eyes on because like I said, it hogties the Fed in terms of their ability to bring rates down.

and we really do need to bring rates down to make house buying and many of the other activities that are interest rate driven to come back into fuller force. So, very, very hard to predict where things are going, but there is definitely a lot of risk out there for the consumer and for the retail industry. As we wrap up, Mark, just a couple more questions for folks that are listening. You live in

breathe this stuff every single day and the rest of us are just, you know, have everything else. Is there a key sort of moment or data point that we could look at to measure how things are going? In other words, you know, at the end of the day, do you look at the stock market? Is the stock market up or down? Or is it the end of the month when you get the jobs numbers or the, your, you know, retail monitor?

What are some things that we could do to look at every day to say, kind of measure on our own amateuristic way, how is the economy kind of fairing up? Yeah, great question. I always tell people that the stock market is not the economy and don't conflate the two. I say almost ignore the stock market because it's reacting to a lot of different stimulus.

what you really have to focus on is the health of the consumer because that is 70 % of our economy. 70 % of GDP is consumer expenditures that drives the outcomes for the rest of our economy. watching very carefully wage rates versus inflation, know, is our wage is continuing to grow. Inflation, like I said, very, very important because the impact on the Fed and the impact on the consumer psyche

and their ability to spend, right? So if you think about services inflation continuing to rise, especially rents, which are a huge, huge proportion of consumer spending, all of that takes away from our ability to spend on goods, right? So it's important to recognize that you only have so much wallet to spread around.

and inflation in services is decreasing our ability to buy discretionary goods because those necessities that we have to buy, we have to buy them anyway, right? So it's hard to cut back on a lot of areas. So we only have so much of a discretionary pie to spend. And that's the first thing that you start looking for when you're looking at goods, right? What's happening in the discretionary space, both on the services side and the good side.

because that's where the cuts start happening first. That's where people start pulling back. So I say that, you you have to look at those things. You know, certainly the stock market, does make somewhat of a difference, but, and that's because it's that wealth effect.

Same with the housing market, right? know, but even when you feel like when the stock market's doing good, don't people feel good? Don't they feel richer even though they absolutely feel richer, but that doesn't necessarily translate into a big bump in spending. Yeah. Historically, we've seen that, you know, a hundred dollar growth in the stock market might, you know, lead to an extra dollar of spending. So there's there's not a huge crossover. It's great for the psyche. But like I said, you know,

Don't pay too much attention to consumer psyche. Don't pay too much attention to consumer sentiment. You really have to follow the dollar and see where that dollar is being spent to understand what's happening in the economy. Years ago when I was first starting this job, there was a retailer I had who said, when you go to the mall, don't look how many people are in the mall. Look how many people are carrying bags in the mall. How many of them actually have gone shopping? And that'll give you an idea of how things are.

It's kind of the same way with the stock market, right? Like, you know, that doesn't really tell you how people are really doing. Yeah, absolutely. Traffic is not worth anything unless it converts into actual transactions. So, yeah, very important to make sure that you're paying attention to things that matter in terms of consumer behavior to understand where the economy is headed. But again, there are so much stuff flying around right now. You know, if we

continue to see deep cuts in the federal workforce. People think that only impacts the DC area. No, that actually impacts the entire country there. Federal jobs spread all over the country and return to office actually potentially helps the DC area and pulls employees out of other economies. So there are a lot of moving parts, but most of them are potentially detrimental to our economy.

Yeah. All right, Mark, thanks so much for your time. Absolutely. And we really appreciate this. We're going to wrap it up and I hope it's probably too early to talk about Christmas sales for 2025. Give it a few months. Yeah. Okay. And we look forward to that retail monitor state by state. I think that'd be really helpful to a lot of folks, myself included, if we could get that information. But in the meantime, we really appreciate it. It's good to see you again, talk to you again. always-

make me feel a little smarter after I hear from you. So thank you. I appreciate it, Tim. My pleasure to be here. All right.