Target, other retailers say consumer spending is fine, but investors see a turning point at hand

The nosedive Target's stock took Wednesday, bringing down the rest of the market with it, happened as investors looked for signs that consumers are cutting their spending because of inflation.

But they're not, according to analysts. At least not yet.

On every retail company earnings call of the last week or so, including Walmart, Target, Home Depot and Lowe's, executives trumpeted the strength of consumer spending.

"I'm not hearing anything that would cause me to think we're seeing a big slowdown," said Brian Yarbrough, an analyst with Edward Jones.

From boat sellers to manufacturers to home builders, all are telling investors and analysts they can't keep up with demand.

"I would think if consumers were concerned, or if you were starting to see consumer spending slow, you wouldn't see them still spending on $400,000 houses and $200,000 boats and RVs and stuff like that," he said. "Maybe that's to come."

For the most part, big retailers are still reporting sales growth, just not at the same supercharged levels as they did for part of 2020 and much of 2021.

During the pandemic, consumers dined out less and cut back on travel. Fueled with stimulus checks, they shifted their spending toward goods. Demand outstripped supply, and manufacturers weren't able to keep up, which has been one factor pushing inflation to decades-high levels in recent months.

There are signs that some of that spending has started moving back to services. Pandemic-weary consumers have been snapping up plane tickets and going to concerts again.

Christina Hennington, Target's chief growth officer, said Wednesday that consumers are taking control at a time when other parts of their world feel out of control.

"Despite the fact that they might have worries about inflation, they're in charge," she said. "And they're making decisions based on their preferences and what they value, which means going back out, if that's what they want to do, traveling because they've missed it, seeing their friends and family again."

Target executives spoke Wednesday of other changes in spending behavior they've seen in the last few months, including buying fewer TVs and less patio furniture. And Walmart executives mentioned this week that they've seen some lower-income consumers trade down from branded goods to lower-priced private-label products.

But earlier this week, the Commerce Department reported that retail sales grew 0.9% in April, a strong signal that consumers are still spending at a decent clip despite the higher prices they're encountering.

While consumer confidence indexes show that inflation is a big concern, it's not yet translating into reduced spending, said PNC senior economist Kurt Rankin.

"They see inflation. They drive by the gas station everyday," he said. "But actions are speaking louder than words because consumers are still spending."

One reason is likely the strength of the job market, with the average number of hours worked per week quite high and the unemployment rate low. Wages are growing, too, though not keeping up with inflation.

Rankin pointed out that this level of spending may not last too much longer, though, especially as household savings, which grew in the pandemic, are now back down to more normal levels.

"Exhausted savings suggests that consumer spending may be in for a slowdown in the coming months," he said.

And while consumers are still spending, it may not be in a healthy way.

"It seems the gap is being bridged by credit card spending," said Rankin. "And given that most households don't pay off their credit cards every month, and with interest rates rising as a result of the Fed's monetary policy, that spells trouble for the next six, 12, 18 months."

At some point, higher prices will have to affect consumer spending, especially if wages aren't keeping up, Yarbrough said. That could in turn help slow down inflation.

But so far, he's not seeing any sign of that in earnings reports and from what retail executives have been saying.

"Most of them have said, 'Hey, Mother's Day was good,'" he said. "And if you listen to what Lowe's said, Home Depot said, Target said, Walmart said, they're off to a very strong start in May."

Father's Day isn't expected to be any different next month, according to a recent survey of consumers.

"Despite growing concerns about inflation, consumers plan to spend approximately the same amount as last year in celebration of Father's Day," National Retail Federation CEO Matthew Shay said in a statement.