A consumer spending recovery powered the economy in 2018 and gave retailers a boost in the vital holiday season, which makes up the lion’s share of profits. While retailers are hoping for more of the same this year, there are a few headwinds on the horizon threatening to weigh on consumers’ spending power.
The trade war between China and the U.S. is on a hiatus after the superpowers made a deal that the U.S. government would put on hold its plans to increase levies on $200 billion worth of Chinese imports to 25 percent from 10 percent on Jan. 1 as part of a 90-day negotiation.
That doesn’t mean the issue has gone away, however, as President Trump warned that if negotiations do not go well, tariffs will rise in March. The President even added that while he hopes to work things out, he is at heart a “tariff man” and has no qualms about slapping more levies on China.
The problem is that if negotiations fail, it increases the likelihood that he will also target another $267 billion worth of Chinese imports to be hit with tariffs. If this happens, it would affect a wide range of retailers and leave them with little choice but to raise prices, hurting consumers.
Another factor at play is the Federal Reserve’s policy of weaning Americans off the easy monetary policies that they became accustomed to in the years following the global downturn.
The central bank has raised the benchmark rate nine times since 2015 and four times in 2018, squeezing in the latest one just before yearend.
While the Fed recently pared back its forecast for 2019 hikes from three to two, retailers will still no doubt be concerned that rising rates could weigh on consumer spending.
Consumers have taken the increases in stride so far, but that could become more difficult as rates creep upward and push borrowing costs higher.
The concern for retailers is that maintaining credit-card balances, student loans and many mortgages will become more expensive as rates continue to edge upward, which could lead consumers to start to curb discretionary spending.
Nevertheless Jerome Powell, the Fed’s chairman, played down these worries, stating in September that while the cost of borrowing is going up, it’s from what were extraordinarily low levels.
“Interest rates are going up across a broad range of consumer borrowing as they would when we raise short term interest rates. They’re still quite low by historical levels,” Powell said. “It’s something we watch carefully.”
Triggered by worries over the trade war, global growth and interest rates, U.S. markets went on a roller-coaster ride in 2018, with more than half of the S&P 500 in a bear market by mid-December.
If the gyrations continue this year and investors fail to see the returns they had been hoping for, it could also start to impact spending — especially luxury purchases.
So far, the high-end sector hasn’t been dented, but that could change in 2019 if the markets fail to bounce back and bonuses start to shrink.