What Is Going on with the American Consumer?

December 1, 2015

Every private equity professional – whether they want to admit it or not – is somewhat of an economist.  Private equity professionals must, by their very nature, follow demographic shifts, economic outlooks, and other economic forces.

The force discussed here is the American consumer, typically considered the driving force of the American economy.  This presumption is based on the observation that around two-thirds of GDP growth stems from consumption (and retail sales is where most of consumption shows up).

Retail Sales on a Year-over-Year View

Here’s a view of the year-over-year picture of the American consumer.

Interestingly, since peaking in summer 2011 at around 8%, retail sales have generally ticked downward.  The most recent tick came in at 1.7%.  That’s just 1.7% year-over-year!

What’s going on?

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The Department Store Picture

Part of the state of the American consumer can be explained by where spending is occurring. Here’s a look at retail sales at department stores.

Fascinatingly, retail sales at department stores haven’t performed real well over the prior 15 years.  Retail sales at department stores have consistently trickled down, although, recently there’s been some uptick in the department stores’ retail sales accounting.

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The Online Retailers’ Picture

Where have retail sales at department stores gone to? You guessed it – online retailers. Now let’s take a look at retail sales of online retailers.

Perhaps completely unsurprising, retail sales at online retailers have consistently grown, with the exception of a brief downtick during the 2008/2009 recession.

online

Is there a connection between sales at online retailers and sales at department stores’ retail sales? An overlay of the two follows.

Putting the Two Together

Perhaps unsurprisingly, the two look like they’re intricately correlated. With the exception of recessionary effects, department stores’ retail sales have generally declined since 2000.  Over this same period, online sales have expanded quickly.

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So, What’s Going on with the American Consumer?

With this background, what explains the surprisingly weak American consumer conditions? Well, part of the answer lies in what was just presented – individuals are shifting some purchases from department stores to online retailers. Thus, even with steady growth in the online retail sales, since they only make up around 7 – 8 percent of all retail sales, their strength is not enough to prop up the other 92%.  This shift probably accounts for a decent portion of the consumer picture.

Other explanations?  Some other possible reasons for the generally low 1.7% Y/Y retail sales growth is pricing competition, very low inflation, and a cautionary consumer.

Conclusion

The American consumer is going through something quite odd right now.  Typically when the economy is 7 years out from a recession, retail sales would be growing quite strong, say in the 5% to 6% Y/Y range. Instead of growing at a healthy pace, retail sales are up just 1.7% Y/Y.  Weak by almost all measures.

What’s behind the weak growth?  Some of the reasons include a shift in shopping from department stores to online retailers, increased competition, very low inflation, and a cautionary consumer.

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