Amid rising inflation and slowing growth, how is the U.S. consumer faring?

Consumer Spending Outlook

• Consumption growth slowed to approximately 1.5% (annualized) in the first three quarters of 2022, down from 7% in 2021.
• Goldman Sachs economists forecast consumption growth to stabilize near 1% for the remainder of 2022 and into 2023, aligning with the Federal Reserve's goal of demand growth below potential to curb inflation without triggering a recession.
• The economic pivot is characterized by a shift from rising household wealth to falling wealth, while real disposable income growth turns positive as pandemic-era fiscal transfers cease.

Drivers of Consumer Behavior

• Willingness to Spend: Spending on services (recreation, dining, transportation) has largely recovered to pre-pandemic levels, with limited further upside expected.
• Ability to Spend: Real disposable income growth resumed in 2022 after a prolonged decline (spring 2021–summer 2022) caused by the expiration of stimulus checks and high inflation outpacing wage gains.
• Wealth Effects: Negative wealth effects are emerging due to declining equity prices and softening home values driven by Federal Reserve rate hikes, offsetting income gains but remaining manageable for now.
• Debt and Credit: While higher interest rates increase debt servicing costs, credit utilization remains below pre-pandemic levels; lending is expected to become more cautious.

Sectoral Spending Trends

• Resilient Categories: Consumers continue to prioritize home improvement, grocery/food at home, health and wellness, and sporting goods; these areas saw growth during the pandemic and remain priorities.
• Declining Categories: Big-ticket items and infrequent purchases, specifically consumer electronics and home furnishings, show significant pullback as consumers delay non-essential capital expenditures.
• Sales Composition: Recent retail growth is increasingly "price-led" (higher ticket prices) rather than "unit-led" (increased volume), reflecting high inflation.

Retail and E-Commerce Dynamics

• Normalization: E-commerce penetration accelerated by roughly 2.5 years in nine months during early pandemic; 2021–mid-2022 represented a normalization period where growth slowed, with Amazon growing 0–1% in the first half of 2022 before recovering to mid-teens growth on easier comparables.
• Long-Term Share: On a normalized three-year basis, e-commerce is still growing in the high single digits and is projected to capture an additional 200 basis points of retail share versus offline.
• Hybrid Retail: "Click and collect" services (pioneered by Walmart and Target) and local delivery partnerships (Uber, DoorDash) have become permanent fixtures, driven by consumer demand for optionality and same-day fulfillment.
• Inventory Management: Retailers successfully avoided the 2021 "empty shelf" scenario for the 2022 holiday season by stocking heavily early, resulting in heavily stocked shelves entering the holiday period.
• Promotional Outlook: Expectations for increased promotions in late 2022 and 2023 are high as retailers balance inventory levels with slowing unit demand; however, prices are not expected to return to pre-pandemic levels.

Technology and Internet Sector

• Growth Trajectory: Large technology companies are entering a lower growth algorithm, with many shifting to low single-digit growth rates due to macroeconomic headwinds and normalization.
• Investment Focus: Growth investors are prioritizing free cash flow visibility over revenue growth as capital expenditures (CapEx) in data centers and infrastructure rise, particularly in the semiconductor and cloud sectors.
• Amazon Performance: Amazon remains the most intact secular bull thesis among tech giants, driven by cloud computing and consumer loyalty (over 90 million Prime households, adding ~5 million via Thursday Night Football content).
• Geographic Risks: Amazon and other e-commerce platforms face slower demand in Europe due to energy price hikes and the Ukraine conflict, while North American demand remains more stable.
• Future Competition: The primary battleground for 2023 is expected to be in high-wallet-share categories like food and CPG, where Amazon historically lacks dominance compared to physical retailers.

Specific Industry Insights

• Auto Parts Retail: Identified as a defensive sector with strong trends due to rising average vehicle ages necessitating repairs amidst supply chain constraints on new and used cars.
• Supply Chain: Supply chain pressures are expected to alleviate in 2023 as the "chase for inventory" concludes and port congestion in Asia eases following the cessation of COVID-related shutdowns.
• Forward-Looking Sentiment: Analysts anticipate 2023 will feature a more balanced mix of unit and price growth, potentially resulting in a healthier retail environment than 2022 as unit comparisons normalize.