One of the key reasons I am not sanguine about the economy in the coming year is the continued deterioration of the outlook for the consumer, which accounts for roughly 70% of economic activity. In short, the consumer is tapped out at this point.
The national personal savings rate is down to a miserly 3.7%. This is the lowest level since 2008, and less than half the rate prior to the pandemic. Buying power of the average consumer has plunged nearly 6% since the start of 2021 and real wages have declined for 18 straight months now. While recent CPI and PPI prints are somewhat encouraging on the inflation front, I don't see real wages increasing in the near future.
With layoffs on the rise, consumers will continue to cut back in 2023 and the year will likely be one notable for 'trading down' behavior. Going out to eat will be scaled back and many families will be trading dinner at upscale Luigi's down the street for Olive Garden. Instead of the three-day weekend at Disneyworld (DIS) , it will be an afternoon excursion to Dave & Buster (PLAY) . Renovation projects that have been put off over the past year because of the soaring cost of supplies and the lack of skilled labor, will now be postponed on increasing worries of being laid off and the focus on maintaining/building savings.
It is also hard to be optimistic about the outlook for big ticket items like a new car or recreational vehicle in the coming year. In addition to pessimistic consumer confidence, the interest rates on loans to finance these purchases have spiked sharply in 2022, with the average auto loan now carrying an interest rate north of 6%. The days of five year auto loans at .9% are long gone.
Walmart (WMT) is likely to be a continued beneficiary of this need to hunker down by consumers. The stock of this retailing giant rose more than 6% in trading yesterday after the company easily beat third quarter expectations. Comparable same store sales rose 8.2% on a year-over-year basis, although to be fair, that was mostly reflecting the impact of higher prices. More importantly, the company managed to improve profit margins within this difficult environment. Walmart also announced a new $20 billion stock buyback authorization and seems to have its inventory levels in good shape.
Meanwhile, rival and slightly more upscale Target (TGT) was getting whacked in early morning trading after missing badly with its own third quarter results. Its comparable same store sales were only up 2.7% from the same period a year ago. The company has suffered for a couple of quarters now due to having too much inventory. Management also stated the weakness in consumer spending it experienced in the third quarter has carried over into the fourth quarter, hardly the harbinger of better tidings on the horizon.
My portfolio continues to be heavily underweight retail and other areas of the market dependent on consumer spending as we close out 2022. Two exceptions are Chewy (CHWY) and to a lesser extent Bark (BARK) as I think spending on our pets is fairly inelastic even in a difficult environment. Besides, Americans need someone to keep them company at home as they cut down on nights out.