Big Retail’s cautious forecasts are spooking Wall Street

By Nicole Goodkind, CNN

Forecasts from Walmart and Home Depot made for a grim day of trading on Tuesday. The mega retailers’ predictions of a weakening economy and a dip in consumer spending this year sent markets tumbling as Wall Street seemed to realize that the Federal Reserve’s campaign to quell inflation could yet lead to recession.

What’s happening: We’ve written about the remarkable strength of the US consumer quite a bit here at Before the Bell. According to Census Bureau data last week, retail sales in January jumped 3% to a record $697 billion — notching their largest gain since March 2021.

Consumer spending accounts for about 70% of America’s gross domestic product, the broadest measure of the US economy, so it’s nearly impossible for the economy to enter a recession as long as consumer spending is growing.

American shoppers have almost single-handedly kept the US economy afloat by continuing to shell out cash for purchases despite stubbornly high inflation. JPMorgan Chase, Bank of America, Deutsche Bank and Goldman Sachs all revised their GDP forecasts upward or put off their expectations for a recession on the back of the strong January report.

But investors are holding their breath, anxious about any sign that the US consumer is wavering.

Walmart and Home Depot stoked those fears, with executives from both companies giving cautious guidance for the year ahead, and warning that consumers were spending more on services and less on nonessential goods.

“The consumer is still very pressured,” Walmart CFO John Rainey told CNBC. “And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.”

Home Depot, meanwhile, said it expects revenue will be little changed in the year ahead, and earnings per share will be down by a mid-single-digit percentage.

“After a year of defying gravity, the slowing economy and pressures on consumers have finally caught up with Home Depot,” said Neil Saunders, managing director of GlobalData. “Our data show that the number of improvement projects done by consumers fell over the prior year as people conserved cash for other activities over the holiday period.”

Superstores like Walmart thrived during the pandemic. That strength continued into the first half of 2022 as some shoppers traded down from high-end stores as inflation hit their wallets. Now, they’re warning that consumers’ budgets may finally be stretched to the max.

More hangups: While American bank accounts are still fairly robust, they’re beginning to dwindle.

Consumers added a total of $398 billion in new debt during the fourth quarter of 2022 — the fourth highest build-up for that period in the past 20 years and nearly 4.5 times larger than a year earlier, according to a new WalletHub survey.

The retail sector as a whole faces a more difficult period. Holiday sales were sluggish for many retailers, and the industry is expected to have a weaker 2023.

Bankruptcies are piling up: Party City, Tuesday Morning, mattress manufacturer Serta Simmons and Independent Pet Partners, a pet store retailer, have filed for bankruptcy in recent weeks.

Bed Bath & Beyond, Rite Aid, Joann Fabric and other chains are also on bankruptcy watch, according to credit rating agencies. These companies have struggled for years and are most vulnerable to challenging economic conditions.

What’s next: Target and Dollar Tree are expected to report fourth quarter earnings next week.

Debt ceiling woes, home sales and union troubles: What Investors are watching today

▸ A new report from the Bipartisan Policy Center projects that, absent Congressional action, the debt limit “X Date” — the day when the US federal government can no longer meet all its obligations in full and on time — will likely arrive in summer or early fall of 2023. BPC’s range takes into account newly available data from the Congressional Budget Office and the Treasury Department.

The BPC warned on Wednesday that the timing will depend heavily on 2022 tax collections. If tax season revenues fall far short of expectations, there could even be a “too close for comfort” situation prior to quarterly tax receipts due on June 15.

The US government hit its debt limit in mid-January, exhausting its ability to borrow money. At that point, the US Treasury began using “extraordinary measures” to allow the federal government to continue paying its bills. Treasury Secretary Janet Yellen said that those measures and existing cash on hand would sustain government operations through at least early June 2023. This year’s debt limit standoff could lead to downgrades of the United States’ credit rating and economic disruption.

▸ US home sales declined in January for the 12th consecutive month as mortgage rates remained elevated and stubbornly high prices kept homebuyers out of the market. This was the weakest month for home sales since 2010.

The continuation of a slowing trend that began in February 2022 is the longest streak of month-to-month declining home sales on record, going back to 1999 for all homes and 1968 for single-family homes.

Sales of existing homes — which include single-family homes, townhouses, condominiums and co-ops — fell a whopping 36.9% in January from a year ago and were down 0.7% from December, according to a National Association of Realtors report released Tuesday.

▸ Starbucks CEO Howard Schultz told CNN’s Poppy Harlow in a recent interview that the sweeping wave of unionization at his coffee houses is a sign that things had gone sour at Starbucks, and for young people in general.

“It’s my belief that the efforts of unionization in America are in many ways a manifestation of a much bigger problem,” he told Harlow. “There is a macro issue here that is much, much bigger than Starbucks.”

The first Starbucks store voted to unionize in December 2021, about five months before Schultz became CEO — this time on an interim basis — for the third, and he says final, time. Even before he officially rejoined the company, Schultz was already alarmed by the union push.

Still, he sees the union as a relatively minor issue that represents the desires of a small group of people.

“I don’t think a union has a place in Starbucks,” he said. “If a de minimis group of people … file for a petition to be unionized, they have a right to do so. But we as a company have a right also to say, we have a different vision that is better.”

ChatGPT and hiring

Cover letters may soon be much less of a burden for job seekers, thanks to ChatGPT and other AI applications. It’s even possible that the new wave of AI that Microsoft and Google are investing heavily in could also help fix labor imbalances.

A new National Bureau of Economic Research study conducted a experiment in an online labor market with nearly half a million jobseekers where a portion of the group received algorithmic writing assistance on their applications. Those jobseekers who got extra help from AI experienced an 8% increase in the probability of getting hired, according to the study.

Best of all, write the researchers, “contrary to concerns that the assistance is taking away a valuable signal, we find no evidence that employers were less satisfied [with those hires].”

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