The big picture may appear rosy, but execs are bracing for a rough patch
The new year begins with plenty of momentum, propelled by a financially stunning 2024 and heralded by a swarm of headlines suggesting that more of the same is in store for 2025. But on the ground, where real consumers live, optimistic forecasts are starting to sound more like whistling past the graveyard.
Industry leaders say they expect conditions to deteriorate before they improve.
As last year ended, the financial media mostly flogged the familiar Goldilocks theme—conditions are not too hot and not too cold. Yes, consumer spending hit a record last year, credit card debt is off the charts, and delinquencies are on the rise. But stock indices have racked up stunning returns, households are flush with homeowner equity, wages are rising, and inflation has been tamed.
Sounds pretty good. Even that universal economic thermometer we see every day—the price of gas—has been flashing good news, falling in many markets below $3 a gallon. You could imagine that things are looking up.
But if you want to know what’s really going on, you have to step way back and look at the big picture.
For example, the Federal Reserve Homeownership Affordability Index is currently as low as it has been since 2006, just before the devastating real estate crash that triggered the Great Recession. A recent headline on the Rent.com website—“Rents Fall as Affordability Improves”—may be accurate as measured in tenths of a percent between one month and the next. However, it rings hollow when you consider that, to afford a median-priced apartment in the U.S., tenants need to earn about $66,000 a year, up 23% since 2019, according to a recent Redfin.com report.
For most industries, 2024 was the year of the trade-down or hold-steady strategy.
At the top, the luxury market ended the year struggling, a result of what Bloomberg describes as a five-year “bling boom-and-bust.” U.S. consumers with “little else to spend their money on” and newly wealthy Chinese splurged on expensive watches and handbags, driving prices off the charts. Today, the U.S. consumer is tapped out, the Chinese real estate bubble has burst, and the Fifth Avenues of the world are a lot less crowded.
Meanwhile, the Nordstrom shopper became a Nordstrom Rack or TJ Maxx customer, and the Whole Foods fan rediscovered Walmart and Kroger. Walmart, once considered the bargain destination for those on tight budgets, is now taking market share from almost all its rivals at every income level. Target and others have had to roll out lower-price promotions and introduce private-label goods to try to compete.
U.S. retail sales for the current fiscal year (ending Jan. 31) are expected to come in around 3% higher than last year, according to the National Retail Federation’s forecast. That sounds pretty good until you consider that inflation for the year was about +3%. So, no real progress there. Inflation is lower, but not enough to ease the high interest rates plaguing debt holders.
Perhaps the most telling datapoint about the state of the consumer economy can be found in widely followed long-term charts of consumer sentiment and expectations from the University of Michigan. The latest data shows that consumers’ feelings about their “current financial situation compared with a year ago” are the lowest they have been—with the exception of the Great Recession—in 45 years.
It is important to note how people are feeling and what their point of view is; otherwise, companies risk believing what they tell themselves.
Michigan’s index of consumer sentiment has rebounded recently from a four-decade low point, but it has a long way to go before it’s time to break out the champagne. In the meantime, successful companies will continue to do what they always have, through good times and bad—be nimble, creative, and never stop talking and listening to customers.
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