415. Why retail remains stronger than headlines suggest

The health of the consumer right now is good. We continue to see strong spending. If we look at the retail monitor data, seven months in a row of positive numbers, and this is destructive.

Despite all the stuff that's going on. So I think things are good right now. I worry a little bit when we look into the future because the points right now are are are good, but if we think about the trend in some cases the trend doesn't look so good right so if we look at unemployment if we look at credit card delinquencies a lot of these are our Trending in the wrong direction. So at this point in time, it looks okay. But if the trend continues, the trend is not our friend.

Welcome to Retail Gets Real, where we hear from retail's most fascinating leaders about the industry that impacts everyone, everywhere, every day. I'm Bill Thorne from the National Retail Federation, and on today's episode We're talking to NRF's chief economist and executive director of research, Mark Matthews. We're going to talk to Mark about consumer spending and sentiment heading into the summer and beyond. Mark, welcome. Once again. To retell get your real.

Thank you for having me, Bill. Now you know, I've said often and uh I think it's become a a mantra that uh nobody is closer to consumers than retailers and nobody's closer to retailers than Than the National Retail Federation. So I always feel like that gives us the opportunity as well as the credibility to talk about the consumer. So what do you consider to be the current health of the consumer?

Yeah, and I think you're absolutely right. I spend a lot of time watching the consumer and and listening to them and then seeing what they do. I I think the health of the consumer right now is good, right? We continue to see strong spending. If we look at the retail monitor data, retail monitor is our own monthly release of retail sales.

seven months in a row of positive numbers. And this is despite all the stuff that's going on. So I think things are good right now. I worry a little bit when we look into the future because The points right now are are are good, but if we think about the trend, in some cases the trend doesn't look so good, right?

So if we look at unemployment, if we look at credit card delinquencies, a lot of these are are trending in the wrong direction. So at this point in time, it looks okay. But if the trend continues, the trend is not our friend. Right. I did see the other day that consumer sentiment has reached an all time low. I mean a record low. So how is this playing out? I mean, if if if consumer sentiment's so low and yet sales remain consistent and high, how do you explain that?

It's a paradox, isn't it? It really is. Uh but what we've seen since the pandemic is a complete dislocation between sentiment and spend. I've seen people refer to it as griping and swiping. And that's what the consumer is doing right now. There are a lot of studies that show that consumers react very, very strongly to certain things, like gas prices, for example. It damages sentiment. And honestly, if you look back over the the history of the last few years, I've I've been around for a while.

I don't think I've seen a five or six year period where there has been this much thrown at people. Think about the pandemic, you think about the high inflation after the pandemic, the the current uh co conflict in the Middle East. It's just one thing after another. And when we look at economic news, there's a study that was done recently that shows that economic news sentiment is five times more negative than it has been in the past.

So consumers have a lot coming at them, but the reality of the matter is that fundamentally, financially, they're not in bad shape. So we have to separate this psyche. from the ability to spend. And consumers have had the ability to spend and they've been spending.

Yeah. You had indicated today earlier when we were talking that There is this concern now, however, that with inflation reaching its level and uh wages not m necessarily keeping up, that that may be a precursor to some more difficult times. Yeah, uh I think one of the pillars of financial strength, one of the things that all have allowed consumers to continue to spend despite their low sentiment has been the fact that we've had wage growth that is higher than inflation.

And that is starting to dissipate. And I mentioned the pandemic. I mentioned five or six years ago, all these challenges that people have had. We've had something along the way that has allowed consumers to spend all of that while. So if we go back to the the post-pandemic government stimulus, consumers had excess savings.

And while inflation was really, really high, those excess savings allowed the consumer to continue to spend. Once they spent through those excess savings, inflation had dropped and wages had risen. So they had that buffer of real wages to continue to spend. So if we think about now you know, excess savings are are out the window. If inflation continues to be higher than than wages and we have negative real wage growth, then I I think that becomes a little bit problematic.

Well, I think also I mean as you look at the gas prices and we've seen them rising and rising and rising and we've been hearing about it uh you can't turn on the T V or listen to the radio without somebody commenting about it. How How do you expect that to impact consumer spend?

Yeah. So the the saving grace for the last few months, you know, when I talk about retail sales being being really strong, is that the Working Families Tax Cut Act meant that we had much higher tax refunds this year than last year, an extra$50 billion thrown at the consumer for the last few months. And that has been, again, another spending stimulus.

Now, if we look into the summer, things are are definitely a little bit more challenged, right? I mentioned to you that uh if inflation continues to be high and wage growth continues to be low, it's a problem. I worry a little bit less about retail than I do about other industries because what we've seen over time is that retailers, consumers, sorry, have protected spending when it comes to retail, especially when it comes to spending on their loved ones.

If we go back over the last couple of years and we look at these uh these spending events like Mother's Day, Father's Day. Valentine's Day, every single time we have seen almost record spend, if not record spend. Yeah. So as we head into the the summer season, you know, back to school spending is one of the biggest events for retailers in the year.

I really believe that consumers are probably gonna cut back in other areas, right? They might travel less, uh, they might drive less, uh, they might spend a little less on eating out. what I do believe is that they're gonna protect that spending on family, right? When it comes to spending on on your kids and and buying them the things that they need for school, that is a an area of spending that has a moat around it. Yeah.

So we often hear about and you know, I'm I'm not like you financial guy. So when people talk about the K-shape economy, what does that mean? The the thing is that economists keep on coming up with different shapes, right? Uh I saw I saw the the people talking about the the C shape and the and the E shape. So uh, you know, it y you're not alone in being a little bit confused by what that means.

But what it really means is that the higher end consumer is performing a lot better than the lower end consumer. And we see that when we look at the data across almost all retail sectors. we see higher spending growth amongst higher incomes than we do amongst the lower incomes. Uh there's a piece of uh research that was done uh last year and this is this was done by Moody's

showed that uh the top 10% of earners used to account for uh 37% of total spend. Back in 1990, they now account for 50% of total spend. So we're living in an economy where higher income households are are driving spending more and more. And in some cases, you can see weakness in in the lower income households, and that's completely obfuscated by the fact that higher income households are actually doing quite well, uh, you know, based on financial markets, based on higher wage growth.

So the K shape is really about those households in a way hiding what's happening amongst lower income households. So when we look at the economy more broadly, we see all these strong numbers, but we have to recognize that underneath the hood, you know, there's different things that are happening to different segments of of the consumer.

And i uh is th does that contribute I guess you know, a lot of times uh what people try to um put together is that these type of economic programs or not economic programs, but th this type of scenario contributes to the overall feeling like the economy's not doing well, people aren't doing well, the you know, the the the future look

you know, more bleak than maybe it is. But the retail industry is pretty resilient. The consumer is pretty resilient. So if people were to focus on how the retail sector is doing, uh what they're doing and maybe what they need to do, what would that be?

Yeah, yeah, I I think if we look at the retail industry over time, you know, th there's nobody better at sussing out what's what's going on with with the consumer. I really do think that if we look at the consumer now, there's this old saying, right, uh consumer is king, right? Right. If anything, that is more true now than it ever has been.

Uh it used to be that, you know, as a retailer, the customer came to you, right? You you had to do things right, but the customer came to you. We live in a world now where the retailer has to go to the customer. For sure. You know, when we look at, you know, Gen Z, Gen Alpha, they behave in a completely different way than uh than than you or I did when when we were younger. And they live on social media platforms and they want to transact wherever they are.

And retailers have to be able to go out and and find these people where they are and create a seamless experience. Not just interest them in the product at the right price, but you know, allow them to buy that product where they are. Right. Yeah, uh absolutely. And you know, I think that's something that uh and not just retail, but all industries are are having to grasp how that's gonna impact. But you know, I think

You know, definitely yeah, we all see it. Uh, you know, when you when you Google something uh five years ago was a very different experience than it is right now. When I Google something, I have so much stuff flying at me. Uh You know, is it is it AI and how how do we how do we measure that? And how do retailers get, you know, make sure that they're showing up in this new form of of search results?

Yeah. So you've been around the National Retail Federation for a while. As a matter of fact, I think we just celebrated uh your tenth anniversary at NRF and you were on retail good real very early on in your in your career here. So you've seen some changes. Uh what what's surprised you?

You know, I I I think that retail is one of the most misunderstood industries out there. And I've I've worked in a few industries. So I have something to to compare. But you know, when you think about, you know, retail workers.

And I think it goes back to the fact that we interact with retail on a daily basis. Sure. So we all think we're experts when it comes to retail. We all think we understand the industry, but we're just seeing one facet of it. You know, we're we're we're seeing people in stores. So everyone thinks that uh, you know, all retail workers are are, you know, frontline in store workers. Sweaters at the gap in the mall.

Exactly. That's only about forty five percent of the workers in our in our industry. Last year we hired more PhDs than than than a lot of other industries. There are so many different roles out there. But it's not just the the employment, it's it's things like you know, retail Armageddon that just seems to keep on coming back over and over again. We now have more stores than we have ever had in the retail industry. And yet people still

talk about the death of the store and how e-commerce is is killing the store. And the reality of the matter is, frankly, you know, it's all part of a coherent ecosystem, right? You know, stores matter. Young kids still like to shop in stores. So I I think there is just there are just so many misperception and misconceptions about what's going on in our industry. I also think that retail is so much more dynamic than I ever thought it was.

the the amount of change in in this industry, the speed of change in the industry. Think back to the pandemic, right? You saw what happened here. You know, we had to completely change our buying behavior in no time flat. And retailers were able to adapt and cater to consumers. uh in a way that befitted the situation. So that dynamism, that that that blows my mind how how quickly this a industry shifts, how you can go from a zero revenue business to a billion dollar revenue business.

uh in what used to take 30 or 40 years, you know, you do it in a year now. So it's just con this constant evolution and change is fascinating. Well I've always said, I mean at the end of the day, that is the commonality. It runs through the bloodstream of retail and that is change. I mean, uh you can't avoid it. You can try to resist it, but if you do, you'll you'll fail. You have to embrace it and invest others in it and you can succeed.

And I I think, you know, going back to this notion of of bankruptcies, right? And and everyone being a a a retail expert, you know, when a retail company goes bankrupt. It makes the news, right? You can lose several billion dollar energy companies in Texas and it doesn't make a blip. But when these retail businesses go bankrupt.

It's headline news. And if you have a few in a row, people start to feel like, oh, oh my goodness, th there's an arm Armageddon happening. What they're not noticing is that those companies are going out of business. Because they haven't been able to keep up with the times. Right. They have not been able to keep up with the consumer and the and the change. And you're constantly seeing this evolution from the bottom.

These companies that are changing the way that we buy, the way that we think about buying, and they are taking market share from people who aren't able to move quickly enough. I last week I saw another one, uh 40,000 stores gonna close. You know what? Doesn't matter how many stores are closing when retail sales are growing.

Right. Right. That's the metric we should be looking at. Right. Stores are closing. I don't know any retail CEO that wouldn't trade revenue growth for store numbers, right? Right, right. So we're looking at the wrong metric. We're measuring things in the wrong way. And that this comes back to this.

this notion that you know it's a misunderstood sector. It's misunderstood by a lot of people who should be paying better attention. A lot of people, you know, sitting on Wall Street who who should be measuring this industry better because it's no longer about you know, same source sales. That that doesn't matter. It's it's really about, you know, the customer and catering to that customer. Yeah, those are your finance pros, I guess, right? That's correct.

For those just starting careers, what what what makes a good economy?

You know, you have to have that inquisitive mind and understand or want to understand. How things are put together, how things work, right? So when you think about, you know, people who want to understand how things work, like a mechanic taking part an engine or a scientist. Understanding how a disease or a pandemic happens. It's the same thing with economics. If you want to understand

what makes this financial world go round? Uh economics is the answer to that. It's like all these data points, you know, we hear about them, CPI, unemployment, all these different things are like puzzle. And to understand where things are going, you need to take those individual pieces of the puzzle and put it together. And I think that's what, you know, it takes to be a good economist. You need to have an interest.

in understanding how things work and putting together that puzzle and figuring out, you know, where things are going. It's not easy. It's it's it's not easy. You know, it it takes a lot of work, but despite what a lot of people think about economists, uh, it can be fascinating, right? Uh it it can also be dry. Don't don't get me wrong. But, you know, I think people...

think about economists and the world of financial services, which is a lot sexier as two different things. I come from the world of financial services and I'm also an economist. And I think those things you know, our hand in glove. And uh you know, I think it can be exciting. So is it economy or economy?

I say economy. Economy I say economy, but I pronounce a lot of things uh kinda weird. Yeah. Yeah. I mean I lived in England for seventeen years. Uh I grew up most of my you know, my life in in other countries. So Yeah, I do have some pronunciation idiosyncrasies to say the least. I appreciate your self awareness. Thank you. Mark Matthews, it is always a pleasure talking with you and it's an honor to be working with you. Thank you for joining us today. My pleasure, thank you.

And thank you all for listening to another episode of Retail Gets Real. You can find more information about this episode at retailgetsreal dot com. I'm Bill Thorne. This is Retail Gets Real. Thanks for listening and until next time.