The Decibel - What on Earth is going on with consumer spending?

Episode Date: June 6, 2023

Canadians have been dealing with high inflation for two years now. But, as consumers, we keep spending. However, the picture of where we spend our money and how much of it is a messy one.The Globe’s retailing reporter Susan Krashinsky Robertson explains why some stores are seeing a drop in some areas of spending, even as Canadians are spending at an extremely high rate.Questions? Comments? Ideas? E-mail us at [e-mail]

You know, it's really interesting. There's a funny thing that's happening with consumer spending right now. Susan Krishinski-Robertson is The Globe's retailing reporter. If you look at the big picture, consumer spending actually looks really, really healthy. Within that picture, though, there's something else going on. Consumer spending is a huge part of our gross domestic product. So we pay close attention to what consumers are spending their money on. People are starting to budget a little bit tighter,

and that's sending signals about where things may be heading. That signal is something called discretionary spending. Think stuff for your home, or clothes, or toys for your kids. It's the non-essential things. We just aren't buying as many these days. So discretionary spending is dropping, even as overall spending is going up. And today on the show, Susan is going to explain what's going on here. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail.

Susan, thank you so much for being here. Thanks for having me. Okay, so let's pull this apart a little bit, Susan. How do we actually know that discretionary spending is down? Well, for that, we listen to what the retailers who sell the stuff are telling us, right? So there were a number of retailers who reported their quarterly earnings recently. And throughout all of those calls, you heard executives talking about very similar things. So take Canadian Tire, for example, huge retailer. And a retailer that has actually a really great view on what's happening in consumer spending because they cover such a wide range of goods. If you think about what's stocked in your local Canadian tire

store, it's a pretty big variety of stuff. And so Canadian Tire talked about how everything that was popular during the pandemic, think about how people were kidding out their backyards, buying stuff to keep them entertained at home. All of that stuff was booming during the pandemic way down now. And what's up right now that's what's keeping Canadian Tire's sales pretty healthy are things like automotive servicing or pet products, things that you think about as essential. Nobody's going to stop feeding their dog, right? Nobody's going to stop servicing their car. And so all of those changes are actually emerging in what the retailers say. And it's not just Canadian Tire. We heard Target talk about how sales of clothing and home goods were down. And even on the other side of things, Home Depot, they talked about big ticket

discretionary, so optional purchases of like appliances and things like that. Those are down. And they also have seen people scaling back home renovation projects and doing smaller projects as opposed to bigger renos. So there's all these little signals that you're hearing from these retailers that something's going on. Yeah, that's interesting. And I wonder, when we're looking at a discount brand, like you mentioned Target, Walmart is also someplace that does a wide variety of things that people shop at for cheaper prices. This is a trend that they're seeing as well then. Yeah, and Walmart talked about the same thing.

So Walmart did great in their recent quarterly earnings for all the reasons you can expect, right? Groceries are really expensive. Walmart sells groceries. Walmart is a discounter. People are flocking to discounters. So Walmart is doing fantastic. But even within those results, they also pointed to general merchandise, which is just a term meaning things like clothing, non-food items, general things are a little bit down for them as well.

So, again, while they're overall doing great, people are coming to them for groceries. They are seeing some softness in those non-essential purchases. Is this the first time in a while then that we've seen this kind of drop in discretionary spending? Like, is this something to notice, I guess, in that way? Well, you know, it's funny. It's not the first time in a while then that we've seen this kind of drop in discretionary spending? Like, is this something to notice, I guess, in that way? Well, you know, it's funny. It's not the first time. And one of the things that's interesting about this is, you know, why now, right? Because inflation has been with us for a long time at this point. We've all been dealing with this for quite a while. So why should it suddenly be the case that these retailers are calling this out? And actually,

if we think back, grocers were really sort of the canary in the coal mine for this. We saw the grocers talking about this months ago, talking about things like people are swapping out name brand products for no name or house brand store brand products a lot more. People are going to discount grocery stores over the big conventional grocery stores. People are swapping out for cheaper cuts of meat. So all of this kind of trend is something that the grocers have been calling out for a long time. And that was the first place that we really started to see it. That was a while ago. What's happening now is it seems to be trickling through to other types of purchases and other retailers. But the question would be, why now?

Yeah. Why now? Why now still? And so what's interesting about that is if you actually pull apart the way consumer sentiment works, it can be a bit lagging. And sometimes it will take a while for this behavior to work its way through the system. So you go to the grocery store. You see how high those prices are. That's your most frequent purchase.

It's where you are probably on more than a weekly basis. You're seeing this and you're feeling that hit to your budget right away. So it makes sense that that would be the first place where behavior would change. And we also saw grocery inflation, like food inflation was up so high, even compared to kind of the rest of the economy, right? This is where people were paying the most because of that food inflation. Yeah, the rise in prices is sharpest in groceries. We've all seen that. And that's been a really consistent trend as inflation has soared.

And so that was the first place where behavior changed. Also, people are feeling the pain, right? Pain is cumulative. And when you've been dealing with this for months and months and months, you start to think about where else in your budget can you start to cut back? So prices are rising. Yes, that's hurting us. There's also a whole other part of the picture about what's happening in the economy, which

is the central bank raising interest rates, trying to cool things down. And when you have an economy or a population, rather, that is as indebted as Canadians are, that hurts. And that pain, like I said, accumulates over the months. So recently, we saw the Canadian Mortgage and Housing Corporation warn that Canada's household debt has surged to the highest level of any group of seven country. And so what that means is we're carrying and servicing a lot of debt. That can be a mortgage on a house, but it's not the only kind of debt, right? You can have other sorts of debt where you're paying monthly interest payments that are changing and

becoming more expensive. I talked to one shopper who's changed her behavior. She doesn't have a mortgage, but she does have a loan. That loan is becoming more expensive to service. That's starting to pinch her in addition to rising prices. And so there are a lot of different factors that are starting to contribute to that. And recently, when the Bank of Nova Scotia reported earnings, they noted that among variable rate mortgage holders, so the mortgages that react to movements in interest rates, they've seen spending on discretionary purchases drop by about 10%. So that's a real signal. People are starting to feel this pain and they're changing their behavior. Okay. So there's, of course, everything is costing a little bit more. So we're paying a little bit more to essentially get less because our dollar's not going as far.

But then also, if you have debt, if you have a loan, if you have a mortgage, you're paying more for that because interest rates are higher. So you're spending more in those areas where so you don't have as much money to pay for groceries or clothes and other things like that. That's right. I mean, you think about the two things that eat up most of our paycheck, right? Food, housing. And, you know, you would add debt to that. Housing is debt, really. But, you know, housing and other types of debt, those are the two biggest things that are eating into budgets. And those are things that are both becoming more expensive. And another part of this is, it's also about sentiment, right? It's also about how do. And another part of this is it's also about sentiment, right? It's also about how do people feel about all of this and how worried are they

about where things are going? Because that's sort of the third leg of the stool, right? So you've got the real impacts on people's budgets, but you've also got the worries that accumulate and the worries also about the future and how people change their behavior in response to that. So the research firm Nielsen IQ looks at the perception of where the economy is at. And in April, they surveyed about 10,000 Canadian households, and they found that 53% thought we're already in a recession. Now, we're not technically in a recession yet. It's actually one of the things that the Bank of Canada is worried about, that the economy has not cooled off. But people feel we're already there because they're hearing about rising prices. They're hearing about the squeeze on household budgets. And they're worried about a coming recession because they hear that a recession is going to be coming. They worry about what

that could mean for their jobs. Jobs in Canada are actually pretty robust. But if you're looking forward to a possible recession, you start to worry about, am I going to come through that? Am I going to be okay? And maybe you start to pull back in preparation for a downturn. And so that sentiment clearly has already begun to shift. And that can also influence things. So this is even though we're not technically in a recession yet, people either think we are or worried we are going to be soon. And so they're pulling back on their spending because of that. That's right. And Nielsen IQ actually refers to something called a consumer recession. And they track this idea of basically people shifting their habits significantly enough that they're acting as

though a recession has arrived. And this research firm compiles what they call a sensitivity score to try to measure how close are we to that consumer recession. This sensitivity score is made up of a bunch of different factors. And then they combine all of that data that they track on consumer spending with some of that survey data that they use on asking consumers how they're feeling. They compile that all into a sensitivity score. And what they say is that when their sensitivity score reaches 80 out of 100, that's when they consider we're in this consumer recession. Where are we right now?

77. Okay, we're almost there. Wow. And that's up from about 71 just six months ago. So what that tells you is people are afraid, people are changing. And that has changed over the last six months, even though as we said before, right, inflation has been with us for a while, but something is shifting more recently. We'll be back after this message. It's actually amazing when we start to think about this stuff, because I feel like we're always, we think this all has to do with numbers, and it does, but a lot of, you know, the changes here are how people feel and the psychology and what they're preparing for. Like, this is a lot of the emotional stuff actually plays into what really happens here. Absolutely. And, you know, I talked about that

shopper that I talked to in Montreal. She told me, you know, she's got a steady job. She's just fine. But she said the same thing. She's worried about what could happen to her in a recession. And so she figured now's the time to cut back. You know, let's let's prepare for the worst and let's make sure that we're keeping a tight hold on things. And I don't think she's alone there. It's important to note that this hurts different segments of the economy differently, right? People are going to food banks to feed their families. And that's a real pain. That's a real difficulty for them. And this sentiment that we're talking about will shift depending on where you

fall on that income spectrum. At the very high end, you're not going to see quite the same changes in behavior as you are when you come down the income spectrum. So then let me ask you about discretionary spending when it comes to this, Susan. Is there a specific price tipping point? Are we only talking about high price discretionary items here, or is it kind of across the board that we're seeing these changes? So I spoke with the CEO of Aldo recently, the footwear retailer, and he told me that they're actually not seeing the pullback in spending you might expect in their shoe stores. You know, Aldo, they also own the shoe stores, call it Spring. He was saying we're doing pretty okay. And one of the reasons he thinks that is, is because their price point is sort of a mid-tier price point.

So they're selling shoes for, you know, 90 bucks, 120 bucks. You know, they kind of are playing in that range of things, give or take, on either end. But what he was saying is he feels there's probably much more of a pullback on that $250 or $300 pair of shoes. The one place he did say he's really noticing is at their other chain, which is called Globo, which really serves families. And he said, right there, we're trying to be quite price sensitive because we know right now families can't afford to splurge. And so in that chain, they were really looking at keeping a tight control on prices to make sure that they can still keep drawing customers in. Okay, so far we've really been focused on goods, right?

We've talked about clothes, housewares, toys, that kind of discretionary thing. But what about the sector of the economy that we call services, right? Like restaurants, travel, those experiences. What exactly are we seeing there, Susan? Yeah, we are seeing an increase in spending on services, and everyone is noting that. So Canadian Tire's CEO said that they believe that a lot of the drop in this discretionary spending

is because people are going out. They're spending on things that we couldn't do during the pandemic. We're still in a bit of a bounce-back phase for things like going out to restaurants, spending on experiences. It's expected to be a very busy summer travel season. People still want to get back out and take those

trips they didn't get to take. And so they're putting their money aside for those things. And so part of the budgeting is just avoiding the pain of inflation, being worried, and some of that is actually saving up for the things we want to do. And so there is that kind of shift from products to services that we are seeing. And how does Canadian consumer spending compare with other countries? Is this a trend that we're seeing elsewhere, too? Or what's the case? Yeah, I mean, we'll take the U.S. as an example. Consumer spending there has also been stronger than economists have expected.

We've actually outpaced our neighbors to the south, even on that. And so it's going to be really interesting to see what happens in the next few months as some more of this concern trickles through the economy and to see whether these signs that we're seeing on discretionary spending continue to tamp things down a little bit. But, you know, we've also got a summer season coming up when, as I said, people are going to be out and about. And so it could remain stronger than expected for a little while longer. I guess we'll see. One of the things that we should think about, of course, is the Bank of Canada's role in all of this. So what might their response be to this complicated picture of spending that we've just been talking about? Yeah, I think that first quarter report really surprised people. And that has led to speculation that the Bank of Canada may need to raise its core interest rate again to further attempt to send a signal and to tamp things down.

That has been the speculation and that could come as early as this week. Right. And the Bank of Canada is actually set to announce whether it's raising rates or not this week on Wednesday. If rates go up even further, you're going to see, again, people with variable rate mortgages feeling that pain, people who have debt to service, and also people more and more worried about the recession that may be to come as a result of all of this. And so this is a compounding effect that could continue. And if people are worried about a recession and they're cutting back on spending in a significant way, I mean, doesn't that actually help kind of increase the risk of an actual recession, like not just a consumer recession, but an actual recession, if that is a trend that continues? It is. And it's what the central bank is in some ways hoping for.

The reason that you raise interest rates is to try to cool the economy off. And one of the ways to cool the economy off is to cool off this consumer spending. They don't want it to be as buoyant as it is because it's continuing to fuel an economy that is a little bit overheated. And so when you see the Bank of Canada talking about cooling things off, this is part of what they're looking at. So retailers must want to entice people back into their stores. If we talked about discretionary spending going down, right? I guess what are they trying to do to revive that kind of spending from consumers and get people to shop a little bit more? Well, it sort of depends on the retailer.

So, you know, in one sense, there are retailers with a big enough variety of goods that they're just really emphasizing the things that are selling well. But they have sent signals that they're expecting more promotional intensity in the market. And what promotional intensity just means is competitors putting up sales to try to draw people in. And so exactly. And so and that's specifically in the discretionary categories. I don't think you're going to see a lot of sales on essential stuff, but you may see retailers putting up promotions on things that are selling softly to try to get them to move. And that's actually something that's been going on for a while because one of the other things that happened in retail is that during the pandemic, when we saw those supply chain disruptions, a lot of retailers stocked up, put in orders way

ahead of time, trying to catch up and to restock on goods that they had a hard time filling the demand for. And in some cases, there were retailers who then found themselves holding too much stuff and having to offload it. So we've been through this funny cycle in the retail world of trying to catch up with consumer demand, trying to meet it, and having supply chain difficulties that made it difficult to do that, then finding yourself with too much stuff, having to offload it. So we've already been through a cycle of promotions. There are some retailers now that are finding themselves with their inventory levels a little bit more evened out. And so because they've just been through the pain of having to put way too much

stuff on sale, they may be a bit reticent about that. At the same time, there are signals that there may be a little bit more promotional intensity. So I wouldn't expect to see rampant sales all over the place or rampant discounting. But you may well see a little bit more intensity as retailers try to keep people in and try to keep people shopping. Okay. So even though the big picture might not look so great, there is a chance you might get a pretty good deal on some of those discretionary items. Keep your eyes open. You never know. Susan, it was great to talk to you. Thank you so much for being here. Thank you.

That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer and Angela Pachenza is our executive editor.

Thanks so much for listening and I'll talk to you tomorrow.