Western capitalist economies are driven by you and me, the consumers, something that has typically been particularly pronounced in America, where consumer spending accounts for close to seventy percent of GDP. So, if we are to assess the state of the economy and the chances of recession as the Fed hikes interest rates, we have to try to get a feel for the consumer. The last few days, with the earnings of the two largest big box stores, and the official retail sales data out this morning should have offered some clarity on that subject.

What do we know now that we didn’t a week ago? Well, if you were to give a speech on the “State of the Consumer,” you would have to begin with the phrase, “The state of the consumer is confusing.”

Yesterday morning, when Walmart (WMT) released results that showed a big beat on top- and bottom-line expectations, most people’s initial reaction would have been positive in terms of what those results said about the consumer. They are, after all, the big daddy of retailers, and if they are doing well, one assumes that consumers are spending freely. However, after rival Target’s (TGT) big miss on EPS and their warning of a potentially weak holiday season this morning, that positivity will have faded considerably. Then this morning, the pendulum swung back the other way when retail sales numbers came in much higher than expected.

If you dig a little deeper into the reports and comments from Walmart and Target, there is a common theme. Both reported consumers becoming more price sensitive, switching to lower priced items, smaller packages, and more name brands, for example, with some weakness in higher ticket, discretionary items such as apparel, electronics, and appliances. Walmart even noted an increase in their sales to customers in higher income brackets. That is not a good sign, and reinforces the view that consumers are feeling the effects of inflation and effectively cutting back.

But then there is the overall retail sales data, which showed a 1.3% increase in spending, and the National Retail Federation forecast for holiday sales increases of between 6% and 8%. That comes on top of a massive 13.5% increase last year as the economy recovered from the pandemic and is significantly higher than the 4.9% average growth in holiday spending over the last ten years.

So, which is it? Are consumers cutting back or spending more? As strange as it may seem, the answer to that question is probably both. They are pinching pennies on the basics, but are still spending money on experiences, as evidenced by generally better than expected results from cruise lines and travel companies in this earnings season.

From an overall economic perspective, it doesn’t really matter where consumers are spending as long as they are still spending. That keeps money churning through the system and, more importantly, shows some confidence in people’s job security and prospects. If your economic stability feels threatened, you cut back overall and you don’t shift spending from essentials to “frivolous” things like vacations and travel.

Essentially, then, the message from the consumer is the same as it is from overall economic data. The jobs market remains strong even as the Fred tries to slow things down, and some corporations are starting to prepare for tougher times by cutting costs, even as others are expanding. As of now, it still isn’t clear if the consumer can save the economy and ensure a soft landing, but there is still a chance they can.

What is clear is that spending patterns are shifting. For investors, that means being selective, focusing on industries and companies that are handling current conditions well rather than just blindly investing in index funds that might be exposed to companies ill-equipped to handle such shifts.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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