What do Target’s tanking profits tell us about the U.S. economy?
If you cleared $1,661 in your semi-monthly paycheck on November 1, 2021 (the take home for the average salary in Minnesota), then, thanks to inflation, you would need to clear $1,781 on November 1, 2022, to be able to buy the same stuff. If the dollar amount of your salary hasn’t gone up by at least 7.2% over the last year, you effectively got a pay cut.
This has been the experience of the average American and this squeeze on real incomes has been especially hard in Minnesota. It follows that, as real incomes fall, people will spend less (they may be able to cushion this for a while by running down savings or borrowing, neither is sustainable). This dynamic seems to be what has hit Target’s profits again.
The Star Tribune reports:
At a time when stores are brimming for the holidays, Target customers have begun to pull back on their impulse spending and save their shopping for when things are on sale.
For the third quarter in a row, Target Corp. missed investor expectations as it continues to see profits suffer in the face of sharp changes in consumer behavior.
This fall, Target’s profit fell 52% compared to last year, more than Target leaders anticipated, in large part due to a more price-conscious consumer who is trying to make dollars stretch while navigating decades-high inflation.
“They’re shopping very carefully on a budget,” Target CEO Brian Cornell said. “And I think they’re looking at discretionary categories and saying, ‘All right, if I’m going to buy, I’m looking for a great deal and great value.'”
Target executives said shoppers are more often choosing cheaper store-brand alternatives to save money.
“It’s obvious that food and essentials are holding up pretty well,” said Neil Saunders, managing director for data analytics firm GlobalData’s retail division. “But once you go across the aisle to non-food and general merchandise, there’s a lot more softness there and of course that’s where the better margins are and that’s what Target has generally been very very good at, pushing those kind of impulse buys and discretionary things that people want to have.”
All of this makes sense. With less spending power, people cut back on ‘luxuries’ while spending on essentials like food holds up better.
But what does it mean for the producers of those ‘luxuries’? If stores like Target cannot sell them they will not order them. If the producers cannot sell them they will not produce them. This is how, as I wrote in August, I think the U.S. could end up in recession which even the media cannot deny. As I asked then:
I think each of these steps follows fairly logically from the other with the ultimate destination, unfortunately, being a recession. If there are breaks in this chain which permit for a different outcome, I would be happy to hear them.
I remain all ears.