All eyes on the consumer ahead of Black Friday and the holidays

(CNN) — It has been a tough year for American consumers. Inflation everywhere. Rapidly rising interest rates. A housing market that is starting to cool off. That begs a question with the holidays right around the corner: Are shoppers finally tapped out?

We’ll get a better sense of that this week.

There is a LOT of data coming out in the next few days that will give important clues about the health of the economy. Beyond a slew of retail earnings reports, the government will report retail sales figures for October on Wednesday. Economists are forecasting a monthly jump of 0.9%. Sales were unchanged in September, a possible sign that inflation was taking its toll on consumers.

But the most recent Consumer Price Index figures for October provided some relief for shoppers…and Wall Street. The pace of year-over-year price increases slowed more than expected, sparking a massive stock market rally Thursday.

Several major retailers are also on tap to report their results for the latest quarter…and potentially give outlooks about sales for the next few months. Walmart, Target, TJ Maxx and Marshalls owner TJX, Macy’s, Kohl’s and Gap are all on the earnings calendar for this week.

The Fed’s relentless rate hikes over the past few months have pushed credit card rates to all-time highs. So it will be costlier than ever for many consumers looking to buy gifts this year with their Visas and Mastercards. Black Friday, after all, is less than two weeks away.

Consumer spending rose 1.4% during the third quarter, according to the government’s most recent gross domestic product (GDP) report. That is still decent growth, but it’s a slowdown from the first and second quarters.

Inflation finally hurting sales?

The big question facing retailers is whether or not they are able to keep raising prices. So far, consumers have (perhaps begrudgingly) continued to spend despite any sticker shock. It helps, of course, that wage growth has remained fairly robust.

“Retailers have been able to pass on rising producer prices to consumers and maintain solid markups over cost,” said economists at Moody’s in a recent 2023 outlook report.

The Moody’s economists added that the still healthy labor market is one reason that consumer demand trends “have remained inordinately resilient.”

Retailers clearly need some good cheer around the holidays. Consumer stocks have been hit hard this year due to inflation worries and recession fears, plunging even more than the broader market.

The SPDR S&P Retail ETF, a fund that has Victoria’s Secret, Abercrombie & Fitch and Gap among its top holdings, is down more than 25% this year.

Still, some experts worry that retailers may continue to struggle in 2023. Consumers may eventually need to watch their wallets more closely as worries about an imminent economic downturn grow.

“What makes us cautious is earnings estimates, which in some cases are a little too high, in our view. With slowing growth, those numbers need to come down,” said Matt Quinlan, a portfolio manager at Franklin Templeton, on a recent webcast.

Quinlan added that “some parts of the…consumer discretionary [sector] would be ones where earnings estimates need to be brought down a little bit more.”

Housing slowdown in focus

The Fed’s rate hikes may eventually slow broader consumer spending. But there’s one other notable area of the economy that has already been hit hard by the central bank’s aggressive tightening: the housing market.

Mortgage rates have spiked to above 7%, making it tougher for first-time home buyers to afford a house.

A report on housing starts and building permits data for October will come out towards the end of this week. So will figures for existing home sales. Economists surveyed by Reuters are forecasting that 4.4 million homes were sold last month. That would be down from 4.7 million homes in September and 6.3 million in October 2021.

The housing market may not necessarily be in the midst of a spectacular collapse like it was in the late 2000s after a subprime mortgage craze fueled a massive bubble. But home sales are clearly losing steam.

With that in mind, it will be interesting to see what home improvement retail giants Home Depot and Lowe’s, which both report earnings this week, have to say about housing.

Both companies may benefit from a “nesting” trend, where current homeowners decide to spend more on home improvement because they want to stay in their house. But the two retailers may get less of a lift if there are fewer new homebuyers looking to fix up houses.

Inflation could be a problem as well. When Home Depot reported its most recent earnings in August, it noted that customers didn’t make as many purchases as they did a year ago.

The number of overall transactions fell 3% from the same period of 2021. But that drop was offset by rising prices. Home Depot said that customers spent an average of a little more than $90 when shopping, up 9% from a year ago.

Investors seem nervous that rising prices will eventually hurt Home Depot and Lowe’s as well. Shares of Home Depot have fallen nearly 25% this year while Lowe’s stock is down about 20%.

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