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As the economy teeters on the brink, experts and investors carefully analyze various indicators to predict the possibility of an impending recession. Recent events, such as the rise in Google searches for the term “recession” and the reversal of government bond yields, have raised concerns in financial circles.
Inflation rates have surpassed the Federal Reserve’s desired levels, prompting the central bank to tighten monetary policy through rate hikes. The Fed has also warned of the looming threat of higher unemployment. With conflicting reports on the likelihood of a recession, the focus is on consumer behavior and how it can provide insights into the future.
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During economic hardship, Americans tend to change their spending habits, a phenomenon known as the “lipstick effect.” This refers to the tendency to splurge on smaller, affordable luxuries such as candles and cosmetics, while delaying important purchases.
Shifts in consumer spending
Executives at Costco Wholesale, the popular department store retailer, have observed shifts in consumer spending at their stores, potentially shedding light on the current economic climate. In a recent call to investors, Costco Chief Financial Officer Richard Galanti revealed some interesting trends. He highlighted how certain customers have opted for more economical alternatives by switching from beef to pork and chicken.
The change in preferences reflects historical patterns seen during previous recessions. Galanti also noted an increase in the purchase of cost-effective canned meat and fish products, which offer lower prices and longer shelf lives. The underlying logic is that during hyperinflation or periods of job loss associated with a recession, consumers can further stretch their savings and unemployment income by stocking up on non-perishable items in advance.
A recently released Federal Reserve report backs up Costco’s observations, showing that 64% of Americans have resorted to buying cheaper versions of products to manage their budgets as inflation rises. Sixty-six percent of surveyed respondents reported using fewer specific products or eliminating them altogether. This aligns with the trend at Costco, where customers are opting for more affordable options across different product categories.
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Galanti further pointed to an increase in sales of Costco’s private label brand, which offers lower prices compared to national brands. Despite adjustments in consumer behavior, Costco saw a 4.2% global and 3.5% drop in sales in the United States in the first quarter of 2023. Galanti attributed a significant portion of this decline to consumers delaying major purchases such as televisions and refrigerators.
Market performance
In response to prevailing inflationary pressures and higher prices, many customers are turning to dollar stores as an alternative. Both Dollar Tree Inc. And Dollar General Corp. have witnessed an increase in the number of customers especially those who buy groceries and other substantial items from the discount stores.
Despite the current challenges, the S&P 500 is still up more than 16% since the start of the year and only about 6% lower than the highs. This includes many of the best-weighted companies that have hit record highs in recent months. Apple inc. is currently up 53% over the past six months and more than 11% higher than previous 2022 highs.
The investment market for retail start-ups is also picking up. The equity crowdfunding market is up more than 50% in amount raised since the lows of 2022. Platforms like StartEngine and Wefunder are still seeing more momentum and increased amount, with StartEngine currently raising more than $15 million in their ongoing funding round.
The question remains: is a recession imminent? Looking at how people spend their money and what’s happening in the market, it seems like the US is headed for some economic challenges, but no one can predict the future. However, 2023 is off to a strong start and there are no signs of slowing down.
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This article Costco Execs Say This One Change in Customer Buying Behavior Signals a Recession Is Coming originally appeared on Benzinga.com
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