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Household cash is moving higher. Here’s what it means for the economy

Customers shop at Walmart in Houston on August 4, 2021.

Brandon Bells | beautiful pictures

After a year of decline, household cash flows will start to pick up again shortly after Christmas and pick up speed in the new year, according to new research by analysts at Goldman Sachs.

According to Goldman’s analysis, these returns would reverse a year of negative growth of about $600, or 4.2 percent, in household discretionary cash flow.

“This year, we’re looking at negative discretionary cash flow for the first time since the 2008-09 financial crisis,” Goldman’s consumer goods analyst Jason English said during a recent webinar with newspapers. The biggest driver of cash flow improvement next year will be wages, he said.

That’s good news for retail sales after a year of struggling to keep up with inflation and the economy’s ability to avoid a recession, according to Mark Zandi, chief economist, Mark Zandi, chief economist at Moody’s Analytics. at Moody’s Analytics, which has a similar forecast for improving consumer finance.

“Cash flow took a hit in 2022 but it is coming back and cash flow is what drives spending,” said Zandi. “Businesses are unlikely to cut jobs because they know their biggest problem is finding workers,” added Zandi.

The relationship between consumer and retail cash flow

While much of the consumer resilience during the period of economic growth slowed, the market punished retail companies, which have fallen by nearly twice the US stock market index. wider this year, as measured by the relative performance of SPDR S&P Retail ETF and S&P 500 Index. This year’s consumer spending results have been volatile as households have less cash – even though they have more in savings – since stimulus payments are designed to combat The Covid pandemic will end in 2021.

According to recent data from the US Department of Commerce, retail sales in the US grew about 10% last year, but most of that reflects the strong dollar value of gasoline and other goods sold at low prices. Prices are on the rise this year, according to recent Commerce Department data. Auto sales grew only 1.5%, much lower than the rate of inflation. That helped slow inflation-adjusted consumer spending growth to about 1.5% in the first half of 2022, compared with nearly 12% a year earlier.

An increase in capital goods spending during the brief Covid downturn, as consumers shopped for furniture and other home-related goods as they spent more time at home, English said. homes due to the pandemic, has contributed to the retail industry slump this year as it pulls demand forward.

But the turning point is coming, according to Goldman.

The drop in consumer cash flow started off as a steep one, but the gap between 2021 and 2022 has gradually narrowed. In the first quarter, consumers had 10% less discretionary cash available than in the same month a year earlier, which Goldman said would shrink to a 2.7% decline this quarter and a 1.2% decline. for the holiday season.

The cash flow measure Goldman uses will add other sources of cash, like transfer payments and government debt, to current income, while subtracting essential expenses like food and fuel. , which gives a fuller picture of consumers’ ability and willingness to spend.

According to Goldman’s estimates for next year, the numbers will be more positive. Consumer cash flow will grow 2% in the first quarter and increase to 6% in the second half of 2023, a total increase of about $600 billion.

Big box retailers can benefit the most

Rising consumer income is good news for the economy, but it may not benefit all companies equally, according to CFRA Research analyst Arun Sundaram and CFRA Research analyst Arun Sundaram. company. Large-scale players like Amazon and Walmart, and to a lesser extent Target, will be the winners and take market share, he said.

The sluggish retail situation this year could give smaller consumer companies access to more select capital markets even as conditions improve. “They should have raised the money a year ago,” said Sundaram. “Now the market is tightening… They’re trying to cut costs and reduce burning cash.”

While Sundaram is focusing on consumer startups that have been listed in recent years, such as OFast and Beyond Meat, the mood of the broader US small business community is less optimistic. with inflation continuing to affect Main Street’s ability to maintain margins at a time of higher prices. in inputs, from raw materials to energy, transport and labor. Most small business owners believe a recession is inevitable; in fact, some think The recession has begun and have reduced their sales outlook for the coming year, according to the latest CNBC survey | SurveyMonkey Small Business for the third quarter of 2022, showing small business confidence to an all-time low.

Meanwhile, the world’s largest retailer Walmart – which lowered its second quarter profit target but then reported a beat on August 16spends much of the second-quarter earnings call explaining investment plans – which chief financial officer John David Rainey said will be a source of hope for the chain to boost profits next year.

Walmart ramped up capital spending from 50% to $7.5 billion in the first half of its fiscal year, which ended in January. Competitor Targethas dropped by 90% second quarter earnings, investment nearly doubled, from $1.34 billion to $2.52 billion. Walmart CFO John Rainey cited building automation and technology throughout its business and how it will continue to help drive greater efficiency, during a call with distributors. after income. He points to the company’s Viz Pick augmented reality technology, which uses workers’ cell phones to speed up the reordering of shelves to avoid lost sales.

Before the next boom in customer income, retailers still have to go through the back-to-school and holiday shopping season, when household incomes will still be slightly lower than in 2021 and beyond. Retailers will still have to deal with excess inventory associated with the goods they have marked and written down.

“If we clean up before the holiday season, we will do much better than the market predicts today,” English said.

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