Consumers are ‘prioritizing essential spending,’ National Retail Federation CEO says

Matthew Shay, president and CEO of the National Retail Federation, joins Yahoo Finance Live to discuss shifts in consumer spending, supply chains, the back-to-school shopping season, and what it means for the retail sector.

Video transcript

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BRIAN CHEUNG: Persistently high inflation weighing heavily on shoppers, with many families expected to cut back on spending to cover the costs of back-to-school materials for their children as we get a little bit closer to the start of school. Again, the US chief economist Jared Bernstein from the White House saying, from their view, spending remains strong. Take a listen to what he said earlier [INAUDIBLE].

JARED BERNSTEIN: There's no question that unacceptably high inflation, as the president continuously presses on that point, is upon the land and really discomforting to family budgets. But the key is, how are jobs faring? How's the labor market faring? How's consumer spending? All of those remain in solid territory, and that is a very important backdrop, a tailwind in an economy with, as you've correctly pointed out, has significant headwinds as well.

BRIAN CHEUNG: Significant headwinds, so will that weigh down on the back-to-school season? Let's bring in the National Retail Federation's President and CEO Matthew Shay on the show. Great to have you on the program, Matthew. Give us a preview of the back-to-school spending season. It's usually a very important season economically. But again, this inflationary environment may be incentivizing some families to make some trade-offs here?

MATTHEW SHAY: Yeah. Brian, it's nice to see you. I think, similar to what you've just heard in the previous clip with Jared, we're seeing in our research, our conversations with consumers, our surveys that consumers and American households are doing, really, what they've been doing since we got into COVID more than two years ago, which is they're prioritizing essential spending, and they're changing their spending patterns and evolving their behavior to meet the environment.

And in the current environment, we have persistent, unacceptably high inflation across virtually all categories, but certainly, especially, in energy and food prices. And so we're seeing households prioritize things like, in this case, back to school and treating that as an essential category, and so therefore shifting some of their spending out of other discretionary categories to make sure they can take care of the things that are most in demand. And in this case, that means taking care of their kids, their elementary, high school, and college students going back to school.

AKIKO FUJITA: Matthew, I guess the question on that front is, what is considered essential in back to school? And we've heard from a number of retailers. This week, it was Walmart saying that, increasingly, they're seeing their consumers sort of trade down. They're focusing on things like food, not spending as much on clothes. I mean, back to school runs the gamut here. Do you anticipate that families will try to cut costs in some parts where maybe they would have spent a lot come fall?

MATTHEW SHAY: Well, you know, your reference to the remarks, and I note what Doug McMillon said about what they're seeing, is that back to school looks like a pretty positive area for them. And so I think, obviously, different families make different choices and prioritize different sorts of things. But back-to-school, back-to-class spending as a category, broadly speaking, is over $100 billion between back to school, which we define as elementary, high school, and back to college, which is about 2/3 of that spend.

And so some of it's going to be in electronics. Some of that's going to be in backpacks, books, apparel. It just depends on that household and that family. And I think we'll see people trade out of higher-priced goods into goods that are priced to fit their budgets. And we'll see households trade out of other discretionary items to get into the things that they determine to be essential for this particular back-to-school season, whatever that may be. And I think that includes everything from apparel and footwear and accessories to electronics, furniture, really runs the gamut.

BRIAN CHEUNG: Matthew, I'm not going to ask you about the specific supply chain issues with, I don't know, pencil boxes or binders or what have you. But broadly speaking, is that as big of a story in 2022 as it was in 2021, knowing that you had a lot of shoppers saying, I might try to go to the store a little bit earlier than normal because I want to make sure that I can actually get the supplies that I need to have my kids ready?

MATTHEW SHAY: Yeah, I think we have seen an improvement in the functioning of the supply chain over the past several months. I think there's a general sense that some of the backlogs are getting sorted out for a variety of reasons that include the kinds of steps that we're taking here in the US, as well as improvements and sort of changes in the COVID environment and workforce patterns in other markets from which we import goods. And all of that is, I think, something that it's been very clear retailers and their supplier partners have really been focused on over the course of the last almost 30 months, 28 months.

So I think the supply chain issue is getting better. And I think it's important to remember the supply chain issue is a byproduct of the demand shock that we dumped into the economy. I mean, the seeds of the current environment were sown 28 months ago when we started to dump almost $10 trillion in fiscal and monetary stimulus into the economy. So the supply chain was functioning fine and well for the economy that existed pre-COVID. What happened was our reaction to COVID impacted the supply chain, and not the other way around. And I think it's important to keep that in mind.

AKIKO FUJITA: Matthew, I wonder if we can look beyond back to school into year-end. We've talked a lot about how consumer confidence is slowing back. The question is, are there-- is the spending going to start to pull back too? What do you see when you look into the all-important holiday season? I know we're months out still, but do you anticipate this sentiment to start to catch up with consumers in how they spend?

MATTHEW SHAY: Yeah, Akiko, I think the interesting thing going all the way back to March of 2020, the best indicator and predictor of consumption, consumer behavior, broadly speaking, has not been consumer confidence, has not been the unemployment rate, has not been the amount of the stimulus per se. The best predictor of consumption has been the savings rate and savings and credit and debt ratios that consumers have.

And so if you think about it in that context, consumers in US households are still $2 and 1/2 trillion ahead of where we were in early 2020 in terms of savings. And so while that's distributed differently, of course, and that's held disproportionately by the higher-income households, as long as that holds up, that sustains consumption. And so the consumer confidence numbers and some of the other things we're seeing, they're not irrelevant, but they're not as accurate a predictor of consumption as what the savings looks like.

And so as long as we have that $2 and 1/2 trillion excess savings over what we had 2 and 1/2 years ago, that's delayed consumption, but it's going to perpetuate demand. And so the next few months will be critical, but we still feel like we're on target for 6% or 7% growth during the calendar year and a good holiday season.

AKIKO FUJITA: Yeah, some important context there in the data that we've been getting. National Retail Federation CEO and President Matthew Shay, appreciate your time today.