Consumer Spending Archives - IHT Wealth Management

Nearshoring is reshaping the North American supply chain, driving a reconfiguration of shipping routes as manufacturers relocate closer to where the American consumer shops. While tariff uncertainties continue to influence trade, large retailers and wholesalers remain relatively insulated, functioning as pass-through entities that can absorb rising input costs while maintaining margins. Even when prices rise, people still need to go shopping for their groceries and staples. Even discretionary goods still get purchased when prices rise, though the quantity and type of good may shift. In this hypercompetitive and turbulent environment many businesses are sharpening their focus on customer retention and differentiation.

A key competitive advantage emerging from this shift is the expansion of last-mile delivery and additional consumer services. E-commerce leaders like Amazon have set high expectations with vertically integrated logistics, prompting traditional retailers and wholesalers to enhance their own delivery capabilities. Historically reliant on third-party services for shipments of groceries, home appliances, and other goods, these companies are now investing in last-mile infrastructure to improve speed and efficiency.

As last-mile delivery evolves, businesses that streamline logistics and expand direct-to-consumer services stand to gain market share. For investors, this sector presents a compelling opportunity to support enabling firms while reducing exposure to the volatility of tariff-sensitive markets.

Serving The American Consumer

While manufacturers often face supply chain challenges related to tariffs, large-scale retailers and wholesalers generally aren’t as sensitive. Wholesalers can purchase goods in bulk, leveraging economies of scale to secure lower prices, and by doing so, can negotiate favorable terms with suppliers and absorb higher shipping costs. Both wholesalers and retailers also benefit from the use of bonded warehouses, where goods are considered to still be in transit, which enable storage without immediate tariff payments. This approach provides them with flexibility in managing inventory costs and delaying the tariff impact until goods are moved into domestic markets and sold to end consumers. Firms like Walmart (WMT) can then pass those costs directly to the consumer if need be in the form of higher prices on both essential and discretionary goods.

Even if tariffs are implemented in the coming months, the major retailers and wholesalers in the U.S. will continue to sell goods to American consumers. Walmart’s recent sales outlook for 2025 sent the stock into a slump due to forecasts lower than what analysts had expected, but they still forecasted 3-4% expected sales growth in the first quarter this year. The American consumer is really hard to slow down! Regardless of the overall economic climate, people need essentials — groceries, cleaning supplies, medicine, etc. — and companies like Walmart (WMT) and Costco (COST) continue to be cost-effective options for Americans. While consumer spending may shift to lower-cost substitutes in a recession, these companies have taken precautions to dampen any worrisome investors.

While added input costs are passed on to consumers, these companies also take steps to “recession-proof” their aisles and provide options for people across the income spectrum. For example, Costco (COST) has leveraged their membership-based business model to create pricing stability for customers. Walmart (WMT) and Target (TGT) both have their own loyalty programs, and even their own private brands which have become more and more popular as people are more open to “trade down” while shopping. Recent survey data from McKinsey & Company suggests that more than 80% of US consumers believe private brands to be of equal or higher quality compared to national brands. So, while Americans are becoming less loyal to brand names and pivoting to private labels like Costco’s Kirkland Signature or Walmart’s Great Value, these chains are still able to retain customers and reward brand loyalty. The composition of goods in grocery carts may change, but where they shop likely won’t.

Building The Right Shopping Experience

With large-scale retailers and wholesalers more insulated from potential tariffs, CEOs are instead contending with how to best balance in-store sales with e-commerce sales. In Walmart’s latest earnings report, considered a bellwether for U.S. consumer trends, e-commerce sales rose 20% YoY and one third of shoppers elected for delivery times of three hours or less. Convenience, speed, and efficiency are top of mind for consumers, and retailers have had to adapt. With the share of goods purchased online continuing to increase, retailers have increasingly turned to micro-fulfillment centers, which are smaller warehouse facilities designed to stock high-demand items closer to consumers. These centers allow for quicker order processing and reduced transportation costs, ensuring that customers receive their purchases faster.

Additionally, the rise of dark stores, retail locations repurposed for online order fulfillments, has helped businesses streamline operations and reduce overhead costs. These dark stores are strategically stocked with high demand products and located in densely populated key markets to reduce delivery times as much as possible. With less foot traffic compared to traditional storefronts, it’s also much easier to implement automated sorting/ packing systems and use robots to speed up fulfillment — whether it be footwear, groceries, or electronics, expect to see more dark stores pop up in your hometown. Investors should also keep in mind the companies that enable the buildout of same-day delivery and micro-fulfillment centers — industrial REITs. Companies like Amazon (AMZN) and Walmart (WMT) collaborate closely with industrial REITs like Prologis Inc (PLD) to develop facilities integrated with cutting-edge automation systems that cater directly to their fulfillment needs.

Even with the need for local fulfillment centers and dark stores, traditional storefronts have also never been more valuable. According to CBRE Group, retail real estate has the lowest vacancies of any commercial real estate sector. It could be as simple as elevated foot traffic from flexible work-from-home schedules or the desire for an expert opinion — but at the end of the day, there’s plenty of reasons for Americans to still shop in-person. In-store shopping still far outweighs online shopping in terms of retail sales dollars. Annual U.S. retail in-store sales for 2023 topped over $7 trillion, while online sales came in slightly above $1 trillion — still a massive difference between the two shopping methods, but one whose gap will likely continue to narrow.

For reference, online sales as a percentage of total retail sales have more than doubled since 2017. So, to further protect the appeal of in-store shopping, retailers can look to promote their installation and pro-shop services. Take Home Depot (HD) for example – as the largest home improvement retailer in the U.S., its earnings are closely tied to housing activity, but even if home sales slow it can still benefit from DIY home renovations by existing homeowners. Offering an expert opinion on drywall installation or paint jobs still has its perks. Either way you slice it; the large retailers have plenty of resources at their disposal to adapt to evolving consumer spending patterns down the road.

Delivering The Goods

With that being said, last-mile delivery is now the name of the game. Companies like DoorDash (DASH), Instacart (CART), and Uber (UBER) dominate last-mile delivery for grocery stores, restaurants, and even convenience stores, but how do the larger players make it happen? Costco, for example, has embraced partnerships with Instacart to offer same-day grocery delivery, allowing members to receive bulk goods without visiting physical warehouse locations. By leveraging these networks, stores can scale their delivery operations without maintaining an extensive fleet of delivery vehicles, making the process both cost-effective and able to comply with consumer expectations.

Even without scale, smaller retailers have options. Walmart’s home delivery service, GoLocal, has gained significant traction and recently announced integration into IBM’s Sterling Order Management system. IBM customers can now access the delivery service through their order management system and greatly reduces the friction for accessing GoLocal’s same-day delivery options. The gig economy drivers within GoLocal’s network are able to deliver goods from places like Home Depot to Sally Beauty, meaning traditional storefronts have almost become their own makeshift warehouses.

On the flip side of that coin is a retailer like Amazon. While the e-commerce giant used to rely on partnerships with the likes of FedEx, UPS, and USPS, the scale at which it’s grown has allowed for the build out of its in-house logistics network to get orders from their distribution centers to the end-consumer. Amazon offers both independent contractor work called Amazon Flex and third-party businesses called Delivery Service Partners for package deliveries, in addition to having their own employees drive their fleet of more than 20,00 electric delivery vans and counting. Reducing the distance between inventory and their customers has also been enabled by their same day delivery centers where fulfillment, sortation, and delivery are all vertically integrated. Besides Whole Foods, Amazon doesn’t have its own stores, so to compete with the likes of Walmart and Target, faster deliveries are the key to customer loyalty.

Investing In The Future

With major players having leveraged third-party services, while also expanding their own logistics networks, it will come down to who can offer the fastest delivery at the lowest cost. To achieve lower costs while not sacrificing quality of service, automation stands to take a front seat in the buildout of last-mile delivery. Drones and driverless cars have quite an opportunity ahead, but the upfront capital investment required will be substantial, meaning partnering with large-scale retailers or third-party delivery services has been common especially during this initial buildout phase. Certain cities like Los Angeles have already seen an increased acceptance of robotics for food delivery thanks to Serve Robotics Inc (SERV). The company’s partnership with Uber (UBER) introduced autonomous sidewalk delivery robots to bring down the all-in costs of ordering food online. Noteworthy is that without having to tip the robot, customers feel like they’re saving money which can lead to a stickier customer base.

Artificial intelligence, outside of robotics, is also transforming last-mile delivery by making routes more efficient and cutting input costs. Predictive analytics allow businesses to foresee demand spikes and allocate resources properly, in turn avoiding costly delivery delays. Embedded AI in third-party delivery services can examine traffic patterns, weather, and roadblocks to recommend the quickest delivery routes and lead to smarter navigation over time. Time is of the essence in last-mile delivery, so every second counts. While AI is already being used in proprietary logistics operations, the next step is to implement at the ground level, meaning equipping delivery drivers with the latest IoT technology to further enhance delivery data collection and overall efficiency. Amazon has reportedly been developing smart glasses for its drivers to assist with road navigation and even navigating hallways in commercial buildings for drop offs. From where we stand today, wearable tech will likely be adopted first by employees like delivery drivers, as there’s more of a use-case compared to the typical American consumer.

Checking Out

Retailers and wholesalers are navigating a rapidly evolving supply chain landscape, balancing the impacts of nearshoring, tariff uncertainties, and shifting shopping preferences. While they can pass through costs associated with tariffs or inflation, their competitive advantage increasingly depends on last-mile delivery innovations and expanded consumer services. The competitive landscape demands investments in logistics, automation, and micro-fulfillment centers to transforming how goods reach customers quickly and efficiently. As e-commerce continues to grow, the retailers that present the best investment opportunities are those who best integrate technology, delivery networks, and in-store experiences to solidify their market dominance.

With the first quarter of 2023 behind us, earnings season is in full swing. Overall, inflation shows signs of slowing, while rate cuts come to an end. Moreover, the recent GDP numbers came in surprisingly strong.

However, volatility in the banking sector continued. Despite the market rally, recession concerns persistently dominate the headlines.

Financial System Remains Resilient in the First Quarter of 2023

Notably, the first part of the banking crisis is behind us. Deposit outflows stabilized. Additionally, all but a handful of banks reported solid earnings in April 2023.

However, regional bank share prices stay exceptionally volatile and bank stability concerns return to the forefront.

Banking Sector Remains Stable in First Quarter of 2023

While investors in regional banks faced volatility, it is important to reiterate the broader bigger picture – the US financial system remains stable and sound. Bank runs and crisis of confidence events at individual institutions are always going to be a risk our system contends with, but the broad health of the system is not in question.

Although periods of instability and uncertainty create detrimental circumstances for individual banks, the long-run fundamentals still matter. Holistically, the United States financial system carries forth in its fundamental stable.

Banking Strategy Pivots to Expressing Cautious Approach

That said, it is not business as usual. Banks across the country stabilized deposit flows, but they are forced to play defense. The system shock shifted perspectives for bankers nationwide; no longer will they be rewarded for originating new loans and aggressively lending the bank’s money.

Rather, being cautious and careful defines the new game. Historically, this kind of tightening of credit standards and newfound reluctance to originate loans leads to a slowing economy.

The Upside of Tightening Credit Standards

Furthermore, this slowdown in credit creation is exactly what the Fed has been trying to achieve. Recent rate hikes make taking on debt less attractive – they are designed to slow the economy down. While the Fed did not want to see a bank crisis, the unintended consequence is that now it is not only rates that are high, but also banks are going to be reluctant to lend as they hoard cash.

While counterintuitive, the tightening of credit standards and slowing loan formation could be positive for the markets. Nobody is rooting for a deep recession or systematic destabilization akin to what we saw in 2008, but a mild slowdown that puts the breaks on inflation and allows the Fed to normalize rate policy? That would give markets a chance to normalize and start being more forward looking.

Can We Achieve a Soft Landing?

An economic slowdown that brings price stability and removes uncertainty from the Fed’s rate hike program is wonderful, but a deep recession is painful and something we would like to avoid.

Right now, the data indicates we are still on track for a “soft landing” or mild recession and can avoid a depression and deep economic pain.

First Quarter of 2023 Shows Growing GDP Estimates

First, just look at the most recent GDP estimates. Advance estimates released at the end of April for Q1 of 2023 show real GDP growing at 1.1% for the quarter. Taking inflation out of the equation, which is a 5.1% growth rate.

While most economists care about the real GDP growth number, after accounting for inflation, it is important to keep in mind the gross 5.1% number because companies report their revenues and earnings without any inflation adjustment. Said another way, economic growth continues to support a broader expansion in corporate earnings, even as we go through a period of financial instability.

Employment and Job Data Reveals Strong Labor Market

Beyond broad GDP numbers there are other metrics worth examining. Employment is particularly noteworthy. As long as unemployment stays low, it is difficult to see us falling into any sort of deep recession or real economic crisis. On this metric the United States is wildly outperforming expectations. Unemployment simply refuses to go up.

Unemployment data from the St. Louis Fed show a rise from around 1,300,000 continuing unemployed insurance claims when the labor market peaked around September of 2022 to 1,858,0000 claims in April 2023. While that sounds high, put it in context: During the Great Financial Crisis, we saw continuing claims peak well over six million. Worth noting these claims peaked over twenty million during COVID-19. Framing it another way, the current unemployment rate is around 3.5%, up from post-COVID low of 3.4%. However, they are nowhere near the unemployment rates we saw during COVID and the Great Financial Crisis.

The strength in employment does not look like it is fading either. While businesses are cutting back on hiring, the broader anecdotal message is that it is exceptionally difficult to find talent right now. Skilled labor appears particularly difficult to find with manufacturers and homebuilders both reporting difficulty hiring. These anecdotal statements are backed up further by job openings data. According to the Bureau of Labor Statistics, we still have more than 1.6 job openings per unemployed person.

Consumer Spending Stabilizes as Savings Rates Increase

Finally, it is worth discussing the health of the American consumer. Consumer balance sheets broadly stabilized in Q4 of 2022, despite having faced inflationary pressures earlier in the year.

Furthermore, savings rates are increasing. In fact, savings rates climbed above 5%. This comes after rates fell under 3% in the summer of 2022 (when inflation was at its worst).

General Market Outlook Coming Away from the First Quarter of 2023

Markets have rallied into 2023 as the path forward on rates and inflation becomes clearer. While there is still significant economic uncertainty, the view for rates appears to be more stable. This mindset broadly buoyed moderate market optimism.

However, we believe it will be difficult for equities to return to 2021 levels over the next few months. Markets need more certainty around the broader economic outlook, prior to picking up steam. Additionally, investors seek insight as to whether the economy can achieve a soft landing.

Pricing Adjustments to Come After First Quarter of 2023

Nonetheless, while companies remain cautious with their annual guidance, they are generally hitting or beating their earnings numbers. While that sounds surprising, take a moment to consider how inflation impacts corporate earnings. At the beginning, inflation usually costs the companies. First, raw materials for products see price increases.

Second, labor prices rise as workers demand more compensation. However, over time the companies can adjust their prices for inflation. More so, revenues tend to rise during and after inflationary periods. It might take several quarters for new pricing to take effect. Contracts have to be renegotiated. In addition, customers have to get comfortable with new pricing dynamics. Over the medium term, companies can raise prices and keep their margins intact.

Fixed Income Improves Along with Global Markets

Fixed Income markets saw improved fundamentals as they neared the end of the rate hike cycle. Overall, yields on bonds are more attractive than they were at this time last year. Higher yields mean more cushion for investors – future interest rate hikes or cuts will have significantly smaller impacts on bond prices now that yields are so much higher.

Outside the United States, the rest of the globe is also starting to find stability. China is emerging after its COVID restricted slump with low interest rates and high savings rates. Furthermore, South America is starting to see green shoots. Recently, Uruguay became the first South American country to cut interest rates since the COVID-19 crisis, putting their inflation fight in the rear-view mirror. Even Europe is finding its footing after the forced consolidation of Credit Suisse settles down.

Looking Ahead After First Quarter of 2023

Looking ahead, there is still uncertainty. On the plus side, it looks like we have made it through the worst of the Fed’s hiking cycle.

Also, the United States economy passed through a challenging time for inflationary pressures and banking. Now, we can look forward to economic stabilization, and hopefully, a resumption of business as usual.

Information accredited to LPL Financial.

After the first quarter of 2023, it is time to reevaluate market strategies. To update your financial plan for 2023 and the years to come, contact the nationwide advising team at IHT Wealth Management today!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.

Investment Advice Offered by IHT Wealth Management, a Registered Investment Advisor