The biggest problem for retailers is still inflation — not the consumer
A new reading on the Federal Reserve’s preferred inflation gauge inched up for July, but the report also showed that consumer spending picked up last month.
The latest inflation data, alongside a host of corporate earnings, which were largely eclipsed by the legal battle unfolding at the Federal Reserve, appears to reinforce a longstanding narrative on Wall Street. American consumers, despite it all, are still shopping through it.
How the president's sweeping trade policies will ultimately impact consumers remains one of the crucial economic questions of the year. Already squeezed by the Fed's restrictive monetary policy and the inflation woes carried over from the pandemic, tariffs had the potential to throw another wrench at household budgets. But corporate earnings, while revealing a mixed picture of shifting behaviors and withheld spending, also showcased a consumer resilience that has bucked expectations.
Mitigation is also the word of the day. Retailers have been grasping for a multitude of strategies to cope with rising costs.
Lori Calvasina, head of US equity strategy research, pointed to Williams-Sonoma (WSM) as a stand-in for how firms as a whole have been grappling with tariffs this earnings season. The cookware and home furnishings retailer adopted a six-point mitigation plan, including cost concessions, resourcing, supply chain efficiencies, cost controls, expanding its made-in-the-USA products, and price increases.
Companies have highlighted the difficulty in knowing where tariffs will end up, Calvasina said in a note on Friday. But firms have also been deliberate in avoiding knee-jerk reactions.
Even as companies have been waiting to see how the trade policies take shape, corporate executives have noted the strength of consumers. Best Buy (BBY) described customers as resilient and deal-focused. Everyone's shopping at Dollar General (DG), which enjoyed growth across all income levels, Calvasina said.
But other retailers, notably Home Depot (HD) and Lowe's (LOW), whose operations are also swayed by the housing market, noted shifts in consumer behavior. Larger discretionary purchases that consumers pick up during moves and renovations slowed as consumers deferred big-ticket items and do-it-yourself projects.
"It’s notable that tariff-related costs have not entirely been felt by retailers and consumers, however, consumers are becoming more cautious, selective, and increasingly driven by price and necessity," said Jeff Buchbinder, chief equity strategist for LPL Financial, in a research note this week.
And for anything connected with the housing market, well, we know why rates are high — a casualty of the inflation battle.
Buchbinder framed this quarter's retail results as mixed, with deep discount retailers outperforming higher-end retailers, like Target (TGT).
"While the full tariff impact is unknown, retailers and consumers alike are navigating significant shifts in the economic landscape."
Something we're all reminded of every time we shop.