The pandemic fueled a passion for all things home—but recent indicators show that the appetite for spending is slowing.
The University of Michigan’s gauge of consumer sentiment fell 58.4 in May from the initial reading of 59.1 earlier in the month— its lowest level in more than 10 years. High inflation remains at the top of consumer minds.
“This recent drop was largely driven by continued negative views on current buying conditions for houses and durables, as well as consumers’ future outlook for the economy, primarily due to concerns over inflation,” said Joanne Hsu, director of consumer surveys at the University of Michigan. “At the same time, consumers expressed less pessimism over future prospects for their personal finances than over future business conditions. Less than one quarter of consumers expected to be worse off financially a year from now.”
Looking into the long term, Hsu said that a majority of consumers expected their financial situation to improve over the next five years; this share is essentially unchanged during 2022. A stable outlook for personal finances may currently support consumer spending. Still, persistently negative views of the economy may come to dominate personal factors in influencing consumer behavior in the future.
Despite falling consumer sentiment, consumer spending is expected to rise in the second quarter, over 9%. However, rising prices will mean that real disposable income will fall 3.6% compared to a year ago.
Some of the biggest home retailers are verifying this.
In its 1Q earnings call, Home Depot reported it expects sales growth and comp sales growth of approximately 3% for fiscal 2022. They are seeing an 11% growth in average ticket, compared to their estimated 5% growth in ticket.
“A lot of that is inflation-driven,” said Home Depot President and CEO Ted Decker. “But our customers are resilient. We are not seeing the sensitivity to that level of inflation that we would have initially expected.”
He said the company is not seeing a big shift out of home improvement, and they are not seeing fatigue with repair and remodeling. “Intent and activity still tracking at the highest levels that we've recorded,” he added.
We all acknowledge there's a great deal of uncertainty in the world we live in today ... But what gives me confidence is that we operate in an industry that is really large and fragmented.
– Laura Alber, president and CEO, Williams-Sonoma
During its 1Q earnings call, Floor & Décor sales guidance forecasts comparable store transactions throughout the rest of fiscal 2022 despite a lot of optimism around remodeling: aging housing stock with 80% of homes 20-plus years old and in need of repair, homeowners with substantial home equity, more remote working happening, and more millennials entering their prime home buying years.
That said, with the Federal Reserve prepared to increase interest rates to fight inflation, this likely means a cooling of existing home sales, home price appreciation, home equity values, and potentially slower spending rates, said Trevor Lang, executive vice president and chief financial officer, Floor & Decor.
“Partially offsetting these headwinds is tremendous home equity, wages continue to be high and unemployment low as well as consumers and businesses balance sheets are strong, which will allow them to make investments as they deem necessary,” Lang said.
Laura Alber, president and CEO, Williams-Sonoma maintains this optimism.
“We all acknowledge there's a great deal of uncertainty in the world we live in today, from rising interest rates to global conflicts. But what gives me confidence is that we operate in an industry that is really large and fragmented. And still, more than half of the sales are generated from smaller brick-and-mortar retailers. And this provides us a huge opportunity. And as we enter the endemic, two things are clear to us: people have reprioritized what's important to them and people love their home. And there's no doubt they're going to continue to entertain, cook and work more in their homes. And in talking to a lot of CEOs, I believe hybrid work is really here to say.”