As the economy teeters on the edge, experts and investors are closely analyzing various indicators to predict the possibility of an impending recession. Recent events, such as the surge in Google (NASDAQ: GOOG) searches for the term "recession" and the inversion of Treasury yields, have raised concerns in financial circles.
Inflation rates have surpassed the Federal Reserve's desired levels, prompting the central bank to tighten its monetary policy through interest rate hikes. The Fed also has cautioned about the looming threat of higher unemployment. With conflicting reports on the likelihood of a recession, attention turns to consumer behavior and how it might offer insights into the future.
During economic hardship, Americans tend to alter their spending patterns, a phenomenon known as the "lipstick effect." This refers to a tendency to splurge on smaller, affordable luxuries like candles and cosmetics while delaying significant purchases.
Shifts In Consumer Spending
Executives at Costco Wholesale (NASDAQ: COST), the popular warehouse club retailer, have observed shifts in consumer spending in their stores, potentially shedding light on the current economic climate. In a recent investor call, Costco Chief Financial Officer Richard Galanti revealed some interesting trends. He highlighted how certain customers have been opting for more economical alternatives by switching from beef to pork and chicken.
The change in preferences echoes historical patterns observed during past recessions. Galanti also noted an increase in the purchase of cost-saving canned meat and fish products, which offer lower prices and longer shelf life. The underlying logic is that during hyperinflation or periods of job loss associated with a recession, consumers can stretch their savings and unemployment income further by stocking up on nonperishable items in advance.
A recently released report from the Federal Reserve supports the Costco observations, indicating that 64% of Americans have resorted to purchasing cheaper versions of products to manage their budgets as inflation rises. Sixty-six percent of respondents surveyed reported using fewer specific products or eliminating them altogether. This aligns with the trend seen at Costco, where customers are opting for more affordable options across various product categories.
Galanti further highlighted a rise in sales of Costco's private label brand, which offers lower prices compared to national brands. Despite adjustments in consumer behavior, Costco experienced a 4.2% decline in sales globally and 3.5% in the United States during the first quarter of 2023. Galanti attributed a significant portion of this decrease to consumers postponing large purchases such as televisions and refrigerators.
Market Performance
In response to the prevailing inflationary pressures and higher prices, many shoppers are turning to dollar stores as an alternative. Both Dollar Tree Inc. and Dollar General Corp. have witnessed an increase in customers, particularly those who are purchasing groceries and other substantial items from the discount retailers.
Despite current challenges, the S&P 500 (NYSE: SPY) is still up more than 16% year-to-date and only down roughly 6% from its highs. This includes many of the top-weighted companies hitting all-time highs in recent months. Apple Inc. is currently on a 53% rally in the past six months and up over 11% from its previous highs in 2022.
The retail startup investing market has been similarly bouncing back. The equity crowdfunding market is up over 50% by amount raised since the 2022 lows. Platforms like StartEngine and Wefunder continue to see increased momentum and amount raised, with StartEngine currently having raised over $15 million in their ongoing investment round.
The question remains: Is a recession looming? Looking at how people are spending their money and what's happening in the market, it seems like the U.S. might be heading toward some economic challenges, but no one can predict the future. However, 2023 is off to a strong start with no signs of slowing down.