Retail Sales Slowed As 2022 Ended. What Does That Mean For 2023?

Economic forecasting is an inexact science, as the National Retail Federation just learned when its predicted Holiday 2022 growth of between 6% to 8% in November and December didn’t materialize.

However, the NRF got mighty close, with the latest reported actuals falling less than 1% shy of the forecast, up 5.3%, excluding autos, gas and restaurants.

Commenting on the year-end results, NRF President and CEO Matthew Shay said in a statement, “We closed out 2022 with impressive annual retail sales and a respectable holiday season.”

And NRF chief economist Jack Kleinhenz added:

“We knew it could be touch-and-go for final holiday sales given early shopping in October that likely pulled some sales forward plus price pressures and cold, stormy weather. The pace of spending was choppy, and consumers may have pulled back more than we had hoped.”

He concluded, “The bottom line is that consumers are still engaged and shopping despite everything happening around them.” But that may be about to change, signaled by two facts the association included in its release.

Overall retail sales, including auto dealers, gasoline stations and restaurants not in the NRF’s calculations, fell 1% in November and 1.1% in December from the previous month, according to the Census Bureau.

The late-year spending pullback is based upon statistically-adjusted numbers, making it even more impactful since it takes out seasonal variations and holiday and trading day differences.

And with the exception of November and December, no other month experienced a decline in month-over-month adjusted retail sales, though three months – May, July and September – were flat.

During the last two months of the year, when people shop more than at any time of the year, they resisted temptation and moderated their spending.

The month-to-month pullback in consumer spending may be retailers' leading key performance indicator (KPI) as they plan for 2023.

Inflationary Gains

Inflation is the wildcard missing from the Census Bureau data, yet it is something consumers feel every time they shop.

Despite the end-of-year monthly pullback, a year-over-year comparison for November and December 2022 shows a healthy uptick in all retail spending, whether looking at the raw (up 5.7%) or the adjusted data (up 6.0%).

But a back-of-the-envelope calculation suggests that inflation which has averaged 8.0% throughout 2022 could be the driving force.

Despite encouraging news that inflation rates began to retreat late in the year to 7.1% in November and 6.5% in December 2022, those calculations are based on consumer price comparisons from November and December the year before, just when inflation began its rise. The 12-month inflation rate was 6.8% in November 2021 and 7.0% in December 2021.

So for all intents and purposes, the typical American consumer continues to pay a lot more for everyday essentials and discretionary indulgences than they did in 2020.

Winners And Losers During Holiday Season

With the exception of dining out, which rose 12.9% on an adjusted basis year-over-year in the last two months of 2022, their shopping choices reflected places where they buy essentials for day-to-day living, like food and beverage stores, up 7.3%, and gasoline stations, up 9.4%.

Online and other non-store retailers also benefited from consumers’ continued adoption of digital commerce, rising 11.6% in November and December.

But other categories of retailers had a very modest showing for the holiday period compared to last year:

• Health and personal care stores, up 3.6% year-over-year
• General merchandise stores, up 3.3%
• Building materials and garden equipment and supplies, up 2.4%
• Miscellaneous stores, up 2.4%
• Sporting goods, hobby, musical instruments and bookstores, up 2.4%
• Motor vehicles and parts dealers, up 1.4%
• Clothing and clothing accessories stores, up 1.1%

And three retail categories declined in the period:

• Furniture and home furnishings stores, off 0.7%
• Department stores (included in the general merchandise category but also reported separately), down 1.9%
• Electronics and appliance stores, down 4.7%

Consumer Caution

Looking out over 2023, U.S. consumers will continue to be careful about how and where they spend their money, favoring necessities over discretionary purchases. Even the top-income consumers, nearly one-third of the nation’s 131.2 million U.S. households, with more flexibility to spend believe it may be time to make a cut.

In a recent study conducted by Research The Affluent among 2,000+ affluent Americans, a near majority (48%) said, “Now is a good time to limit my purchasing.”

Particularly noteworthy is that the survey sample was skewed (70%) toward high-net-worth individuals with $1+ million net worth, excluding their primary residence. It also included 30% defined as high-earners-not-rich-yet (HENRYs) with less than $1 million in net worth.

“Some 69 percent of the affluents surveyed see a recession coming within the next six months, if it isn’t already here,” said Chandler Mount, the study’s lead researcher.

As retailers look out to 2023 and all the headwinds they face, they should heed the advice of William Arthur Ward: “The pessimist complains about the wind; the optimist expects it to change; the realists adjust the sails.”

Conditions are bound to get worse before they get better, so retailers need to stay vigilant to even micro-changes in the economy and shopping patterns in their stores. Unlike in the recent past when all boats rose with the tide, now the tide is going out. Retailers must take market share to keep growing.

Flexiblity Required

Economist Bill Conerly and fellow Forbes.com contributor has advice after more than 40 years forecasting the economy. With all the mixed signals the economy is throwing up right now, an economist might be retail leaders’ best friend in the coming year.

“I hold to the belief that to forecast demand for your product or service, you are better off using an economist than an accountant or engineer,” he wrote in his book The Flexible Stance: Thriving in a Boom/Bust Economy.

“We economists are trained to sort through data, to separate trends from random variation. We understand that most things, such as your company’s sales, move up and down in response to multiple factors,” he continued.

One of those factors could be if consumers continue to pull back spending month-to-month. Many retailers may be caught flat-footed, coming off a period of dynamic growth.

Comparing business to playing poker, he advises retailers to continue to minimize their losses but also cautions,“Minimizing losses is not how one wins in the end. Minimizing losses on bad hands must be combined with fully exploiting good hands for maximum jackpots.”

That’s where being flexible, innovative and willing to adjust plans to rapidly changing conditions gives the advantage to disruptive retailers. They will be ready to take share from their less agile competitors.

“It’s hard for people to internalize the thinking needed in a more cyclical economy,” he wrote, which is just what we are confronting in 2023.

“But there’s good news: Most businesses will find it difficult adjusting to the new environment,” he added. “[And] it’s very good news for the business leaders with the discipline to learn and apply The Flexible Stance.

“The right decisions are not hard to figure out, but they require a discipline to think through the ways to achieve flexibility. Your competitors may not have the foresight and discipline to use The Flexible Stance themselves,” he concluded.