Michael Ashley Schulman predicts that Prime Day sales growth will be smaller than in recent years

While normal levels of Prime Day fervor exist, this year could be different due to widespread anxiety about consumers' ability to withstand the current economic downturn

According to Reuters, Amazon's 48-hour Prime Day mega-sale event began on July 11, 2023, with steeper discounts than in previous years.

Running Point Capital Advisors' chief investment manager Michael Ashley Schulman predicts that Prime Day sales growth will be smaller than in recent years. In 2017, Prime Day sales totaled approximately $12 billion, an increase of 8.5% from the prior year.

Schulman predicts that this year Amazon Prime members will focus more on purchasing necessities like food, hygiene, and cleaning supplies than on splurging on luxury items.

While normal levels of Prime Day fervor exist, this year could be different due to widespread anxiety about consumers' ability to withstand the current economic downturn.

Nearly 70% of Americans anticipate a recession within the next six months, according to a Nationwide Economic Impact study of 2,000 consumers conducted in April. Over 60% of those who anticipate a recession in the near future think it will be as terrible as, or even worse than, the Great Recession of 2007-2009.

Even online shopping giant Amazon (AMZN +1.3%) is feeling the pinch as shoppers abandon their carts. Marshal Cohen, chief retail advisor at Circana, describes the current economic climate as a "consumer recession" in a research report. "Many consumers are experiencing their own economic downturns, even if the broader U.S. economy is not in a recession."

Amazon and the stores that benefit from its summer sales event like Walmart (-0.1%), Target (-0.6%), and Best Buy (+2.4%) count on customers spending heavily this year. And they might as a farewell act before the economic downturn.

The consensus among professionals appears to be optimistic, at least in public. On CBS's Face the Nation, Treasury Secretary Janet Yellen warned that a national recession is "not completely off the table," but she reassured viewers by noting that job growth is strong and inflation, while still "too high," is decreasing.

This follows a revision up to 2% for first-quarter GDP by the Bureau of Economic Analysis. Personal income after tax and other personal expenditures, including consumer spending, were also reported to have increased little through May.

While it predicted 1.8% annual average growth for this year in March, Goldman Sachs lowered the likelihood of recession over the following 12 months to 25% in June.

According to Jack Kleinhenz, chief economist of the National Retail Federation, the economy is expected to experience a "soft landing" and "does not appear in a recession." He did, however, admit that there were mixed signals coming from customers.

Despite customers' pessimistic poll responses, he saw robust spending in the second quarter. When asked about the future of the American customer, he said firmly, "What we've learned over the last several years is don't count the American consumer out, at least not yet."

Kleinhenz and many other economists seem to be placing greater stock in their old models, despite the fact that the economic outlook is described as "looking into a kaleidoscope" depending on which data set is in view. On the other hand, the Wall Street Journal has issued a warning that "if the U.S. is in recession, it's a very strange one."

Where It All Begins

It seems that this time around, the conventional economic solutions advocated by experts are at odds with the sentiments of average customers. Consumers in the United States only care about their individual employment situations and not the national employment rate.

While the Census' statistics on retail trade suggests that consumers' spending is on an upward trend, this is not a complete picture of the looming consumer slump because it does not account for inflation.

For instance, McKinsey discovered that in March and April 2023, consumers of all ages and economic brackets spent less money than they did the previous year. Data from Affinity Solutions and Stackline, which in turn sourced information from Amazon, was used to conduct the analysis.

As an aside, the Federal Reserve Bank of New York stated that credit card balances remained at a record high of $986 billion in the first quarter, "bucking the typical trend of balance declines in first quarters." In addition, during this time period, borrowers took out a larger share of their income in the form of vehicle, consumer, and retail credit cards.

McKinsey's U.S. Consumer Pulse Survey, conducted in late April among 4,000 consumers, showed that consumers' optimism in the economy increased from 33% to 36%. Despite this, consumers' "intent to splurge," or make discretionary purchases, has not "translated into action."

Sales Decline at Major Retailers

Recent statistics from retailers that rely heavily on discretionary spending from customers illustrate the slowdown in consumer spending:

Net sales for Levi's freshly reported second quarter were down 9% year over year, with a massive 22% reduction in the Americas. A significant portion of that drop is attributable to a 33% drop in wholesale revenues associated with its value brands. "Wholesale is very soft, with lower to moderate income consumers clearly being squeezed," CEO Chip Bergh said in the results call.

The company's largest brand, the value-oriented Old Navy, had sales fall by only 1% to $1.8 billion, while GapGPS +5.6% ($692 million) fell 13%, Banana Republic ($432 million) fell 10%, and Athleta ($321 million) fell 11% in the first quarter. Mid- to high-single digit losses are projected at the end of the fiscal year 2023.

QVCQVCA +4.6% and HSN, both of which are owned by Qurate and rely heavily on impulse buying, saw their first-quarter revenue decline by 8% to $2.6 billion due to "fewer customers and weakened consumer sentiment."

Macy's stores, the go-to for the middle class, saw an 8.7 percent drop in sales during the first quarter. "Starting in late March, demand trends weakened further in our discretionary categories," Macy's chairman and CEO Jeff Gennette said in a statement.

Even Amazon has hit hard times. With annual net product sales of $242.9 billion in 2022, up less than 1 percent from $241.8 billion in 2021, the company had a decline of 1.2% in the final quarter of that year. As a result of a robust January across the retail industry, product sales increased by 1% in the first quarter of 2023, totaling $57 billion.

Retailers' Experiences Reflect Customers' Perceptions

Warren Shoulberg, a veteran observer of the retail industry, has developed a straightforward formula for gauging consumers' relative strength or weakness that has stood the test of time over the previous two decades. The Wal/Get Guage, as he calls it.

If Walmart is thriving, the economy is in bad shape and life in general is less than ideal. The economy is growing and things are looking quite good when TargetTGT +1.3% is doing well, he wrote in Gifts & Decorative Accessories.

What matters most is how buyers see things. In times of economic uncertainty, many Americans trust Walmart's "Save Money. Live Better." claim and shop there for necessities.

Target, on the other hand, has cultivated a more upscale cheap-chic image (dubbed "Tarjay"), and its pricing are comparable to Walmart's for many things. However, shoppers view Target as a place to satisfy their desires rather than their needs, so they hold back when they are nervous.

The Wal/Get Gauge is supported by the latest quarterly results from both firms. In the United States, Walmart saw a 7.4% increase in sales, to $103.9 billion, on the back of a 2.9% increase in volume. More affluent consumers were drawn to the company, leading to a 27% increase in online sales and a larger part of the grocery industry.

But Walmart reported a decline in the mid-single digits for its home, electronics, and fashion categories of discretionary general products.

Customers at Target also shifted toward buying necessities rather than wants, albeit the retailer's selection of necessities didn't prove quite as alluring. Comparable sales were unchanged for Target in the first quarter, with online sales down 3.4% and in-store sales up 0.7%, contributing to overall revenue growth of 0.5% to $25 billion.

During the months of March and April, the company's discretionary categories, which include home, apparel, and hardlines, continued to soften, while its "frequency" categories, which include food, beverage, household staples, and beauty, grew.

Target's chief growth officer Christina Hennington remarked on the earnings call that "American consumers continue to face difficult trade-off decisions as they juggle the wants and needs of their families." Though discretionary spending remains down, our guests are still eager to add a little bit of inexpensive delight to their routine shopping at Target despite the fact that "the fear of a looming recession weighs heavily on many American families."

When the expected economic downturn arrives, consumers will undoubtedly look for ways to boost their mood, and they are more likely to find what they're looking for in experiences rather than material goods.

According to McKinsey, real out-of-home travel and entertainment expenditures among consumers rose by 2% year over year in April. And among the survey's 12 categories, spending lavishly on dining out was the top priority.

Worrying Predictions

Even while the Conference Board is still 99 percent certain that a recession will hit the U.S. economy, the start date was moved out by a quarter to the second half of 2023 in the most current estimate by principal economist Erik Lundh.

Previously, he had predicted that GDP would fall by 0.6% in the second quarter, but now he anticipates an increase of 0.6%. Next, Lundh anticipates a -1.2 percentage point drop in Q4 2023, followed by -2.1 percentage points in Q1 2024.

As time goes on, consumers will put off impulsive buys in favor of stocking up on necessities at places like Walmart and bargain retailers like dollar shops and dollar general.

Consumers may boost Amazon's Prime Day and the revenues of others trying to cash in on the summer sales action in anticipation of this, but then the other shoe will drop.

Cohen, of Circana, cautions, "The needs and expectations of budget-conscious consumers are evolving." If you want a bigger share of the income pie, you'll need to do more with less since "the spending pie has gotten smaller but the competition has remained the same."