Economic Watch: Recession Fears Make a Comeback, Consumer Power Weakens – 6 October 2023

Economic Watch: Recession Fears Make a Comeback, Consumer Power Weakens - 6 October 2023
Key Points
  • The apparel industry isn’t doing well, with consumer spending weakening even more since August
  • Weaker consumer spending is weakening corporate revenues, which leads to weaker incomes
  • Recession fears are coming back as economic woes continue. Be prudent with your business expenditures

The economic climate is still looking mixed as more consumers aim to save up in preparation for an impending recession. Amidst the gloomy outlook, the apparel industry may potentially be in trouble with how several surveys indicate a shift away from discretionary or luxury spending, especially with the resumption of student loan repayments.

The tightening situation we’re seeing is set to continue to spiral down slowly as per previous months. Are we heading towards rough seas?

Apparel Industry Takes a Hit

A rack of clothes inside a clothing store

According to a survey on consumer spending conducted by UBS Research, 40 percent of consumers polled expect to reduce their spending on new apparel in order to pay their student loans.

“If the student loan issue causes consumers to shift $10B away from softgoods ([referring to clothing, outerwear, and linens] which is estimated to be $500B for all U.S. sales) in order to repay student loans, this would be a 2% headwind on industry sales.”

UBS Research

Additionally, Jefferies’ outlook report indicates that “~54 [percent] and ~46 [percent] of respondents plan to spend less on apparel/accessories and footwear, respectively,” to make way for student loan repayments. On top of that, 51 percent aim to do less shopping for apparel/accessories items, while 48 percent will do the same regarding footwear.

Meanwhile, the UBS Evidence Lab’s industry outlook also painted a weaker picture for the industry, with “consumer spending intentions for softgoods for the next 90 days” declining by 3.5 percent from last year’s figure. Moreover, it’s expected that a slowdown in said spending will occur over the next six to 12 months, if not longer.

In a separate study, J.P. Morgan’s September 2023 Cost of Living Survey noted a “significant apparel trade-down” among consumers, as 43 percent of consumers have said they will spend less on apparel and footwear while spending on “cheaper items from the same brand, shopping at an off-price retailer” or even buying from a completely different brand.

In that same report, casual and athletic wear ranked first in the “prioritized apparel category,” as 63 percent of respondents believe they are of higher priority than other types of apparel.

As a result of the poorer outlook, Jefferies expresses caution on Foot Locker’s performance due to this possibility of a consumer spending slowdown, which could lead to an “incremental downside to the company’s financial performance. This may be something we see happening with other brands if this downturn does come to pass.

The pressures consumers feel will only remain strong or worsen as the current economic cycle continues. It’s, therefore, important to keep saving up for the eventual recession to come. Expect there to be more debt, even higher interest rates, far tighter lending standards, and reduced corporate and consumer incomes.

Corporate Revenues Dwindling Further

The unemployment rate is still at historic lows (currently at 3.8 percent as of August 2023), while new job openings saw a sudden surge in August, with 690,000 job openings as of the last day of August. Despite that, consumer spending seems to be cooling following its 0.4 percent rise in August from July’s 0.9 percent, while personal incomes rose a meager 0.4 percent.

US unemployment rate
US unemployment rate; sourced from Trading Economics

We’re also seeing a trend where nominal (current value without including inflation and other market factors) growth in consumer spending and personal incomes look strong, but their real (current value after adjusting for inflation and other market factors) growth is trending in the opposite direction. High nominal spending has kept nominal corporate revenue largely in good shape, thereby supporting employment. However, real spending is currently sluggish as consumers begin to save up.

US real consumer net worth
Sourced from Piper Sandler

As we’ve already stated earlier, weakening revenue growth isn’t just due to weaker consumer spending. But it’s important to note that companies are more likely to cut jobs to improve revenues as revenues slow. Nominal revenues may have expanded, but real revenues have not seen substantial growth in a while, and that is of concern.

US real domestic corporate revenue, year-over-year change
Sourced from Piper Sandler

Revenues are important because they drive employment. The business cycle exists because of companies, not consumers; as long as they continue to do business, consumer and capital spending will still be going. It’s still uncertain if the Federal Reserve will hike rates in the months to come, following no change in September’s announcement, but even if they don’t, the impact of the tightening will still be felt for a lot longer than anticipated.

“It takes about one year of Fed tightening to weaken corporate revenues. Then it then takes another year for companies to realize they need to cut jobs. So it takes roughly 2 years after Fed liftoff for unemployment to increase… The “normal” range from liftoff to rising joblessness is 15 to 28 months – and we’re at 19 right now.”

Nancy Lazar for Piper Sandler
Fed funds rate and unemployment rate comparison in months
Sourced from Piper Sandler

We’re already seeing the effects of this happening: Lululemon laid off 120 workers not long ago, while La Perla hasn’t paid its US corporate executives for a month. It’s also bad news in other industries, like with Epic Games laying off 870 employees.

Consumer Statistics

It’s worth repeating that companies drive the business cycle. Employment begets income, which consumers can use to spend on various goods and services. This, in turn, drives companies to do more with their profits, which includes adding more employment opportunities and increasing incomes. And so the cycle repeats – ideally, that is.

It’s why unemployment is never a good thing: unemployment leads to lower spending and, thus, lower corporate revenues. And so this cycle repeats in its own way.

Total household card spending has already seen a drop in the week ending September 23rd, going down 0.3 percent year-over-year. Clothing saw a particularly concerning decline, going down 4.0 percent year-over-year.

Aggregated daily card spending growth per household by major category, Sep 10-Sep 23
Aggregated daily card spending growth per household by major category, Sep 10-Sep 23; sourced from BofA Global Research

Meanwhile, weekly foot traffic data for September also trended lower across various segments, including those that saw gains in the past six months, such as leisure & recreation, as well as restaurants and hotels.

Weekly foot traffic for various economic segments
Sourced from Piper Sandler

Though nominal disposable income has trended slightly higher in August, real disposable income is currently down for three months in a row. This is also in spite of nominal consumer net worth going up: once inflation is taken into account, the consumer’s real net worth isn’t looking too good anymore.

US nominal and real disposable personal income
Sourced from Piper Sandler

The personal savings rate also declined to 3.9 percent, the lowest level it’s been since last December. Even as wages somewhat increased, consumers are nonetheless feeling the pinch as they withdraw from their savings to afford groceries and make various purchases and payments.

Consumers are more than ready to start saving up, though. J.P. Morgan’s September 2023 Cost of Living Survey noted that the “higher cost of mortgages” affected 71 percent of respondents; they’re more than willing to cut down on their costs. Meanwhile, 67 percent of respondents were “worried about making timely student loan payments.”

What’s also concerning is how “more than half of U.S. low-to-middle-income consumers interviewed said that their income has not increased in the last six months,” according to the study. With how interest rates now average at 7.2 percent, compared to 3.9 percent four years ago, it’s no surprise that consumer confidence has tanked – especially for low and middle-income households.

“Consumers are understandably unsure about the trajectory of the economy given multiple sources of uncertainty, for example over the possible shutdown of the federal government and labor disputes in the auto industry. Until more information emerges about these developments, though, consumers have reserved judgement on whether economic conditions have materially changed from the past few months.”

Joanne Hsu, Director of the University of Michigan Surveys of Consumers

And as employment slows and credit softens, Piper Sandler expects real consumer spending will likely slow to 1.5 percent year-over-year for 2023.

Loans Still Tight

It doesn’t help that banks are also less willing to make consumer loans, per the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). You’d apply for consumer loans to pay for purchasing houses and cars and use credit cards.

Naturally, this shouldn’t be surprising, given how elevated rates have reached throughout the year. With its current average of 20.7 percent interest, credit card debt is still on the rise, not to mention credit debt currently standing at 16 percent year-over-year. If anything, the weak real consumer net worth growth has only lowered appetites for borrowing, which explains the weaker loan demand.

US bank willingness to make consumer loans, net percentage of banks easing
Sourced from Piper Sandler
US bank willingness to make consumer loans, net percentage of banks easing, seasonally adjusted
Sourced from Piper Sandler

In fact, banks’ willingness to make loans has become far more restrictive than it was during the 2001 recession. Piper Sandler notes that SLOOS is a leading indicator for bank loans (a lagging indicator by comparison) by 6 months, suggesting that bank loans will only continue declining even into 2024.

The one source of relief comes from President Biden’s newest round of student loan forgiveness, amounting to $9 billion that benefits 125,000 borrowers. Still, when you think about it, $9 billion worth of loans spread out between 125,000 people is a staggering amount of repayment to be made – that’s an average of $72,000 per person!

So What’s the Next Move?

Apparel spending has already declined over the months, and it looks like it’s about to worsen. Late 2023 looks like a depressing time for the apparel industry, and it’s unsure how soon things will improve. After all, the US economy as a whole is slowing down as the Fed continues to battle inflation, and consumer spending power, as well as corporate profits, keeps weakening. Interest rates are catching up to companies, unemployment is coming, spending will go down, and we expect a recession to be on the cards by year-end or at the start of 2024.

It’s important to keep saving up and building strength in your financial position. Keep your existing customers happy, as they’re going to be the main profit-makers of your apparel printing business. See where you can add more value to your shop without incurring additional expenses and step up your customer service; think about how you can further enrich your customers’ buying experience so that you’ll retain them through the bad times.