Recession’s Hidden Signs: What Fragile Consumers May Be Telling Us

Maybe you’re struggling to pay down your credit card bill from the December holidays or skipping the new grill. Perhaps you’re even forgoing new boxers or treating yourself to a fresh lipstick rather than that pricey dress. If so, you may be a hidden indicator.

As persistent inflation, rising borrowing costs and more frequent layoffs stretch household budgets, everyone is looking for ways to measure the impact on the economy. After all, how consumers are responding says a lot about the likelihood of a U.S. recession. Their spending powers the nation’s gross domestic product, accounting for about two-thirds of it. 

“Consumers continue to face difficult tradeoff decisions as they juggle the wants and needs of their families,” Target Executive Vice President Christina Hennington said last Wednesday during a conference call on the company’s fiscal first-quarter financial results. “The fear of a looming recession weighs heavily on many American families.” 

Despite the steep increases in benchmark interest rates over the past year, the U.S. economy has so far evaded recession (roughly defined as a decline in GDP over two consecutive quarters,) and metrics like retail sales and payrolls show spending and the job market are stable if not still growing slowly. But signs of a more fragile consumer — or at least a more cautious one — are cropping up left and right. 

Big box retailers say they’re seeing more shoppers avoid items they want rather than need: things like clothing, home furnishings and electronics at Target and Walmart, and patio sets, grills and appliances at Home Depot. Customers at Home Depot are scaling down or deferring parts of their home improvement projects enough that executives there lowered their fiscal 2023 sales forecast last week.

“The size of the projects are getting a bit smaller,” Home Depot Chief Executive Officer Ted Decker said during a conference call in which he predicted sales would drop 2%-5% for the year. “Rather than do an entire room or an entire basement, you start working away at it in smaller chunks.”

And then there are signs of heavier borrowing, maybe because it’s taking consumers more time to pay off their credit card balances. While people typically recover from their yearend holiday gift giving in the early months of the following year, the total balance on U.S. credit cards stayed put at $986 billion in the first quarter, failing to drop from the fourth quarter for the first time in 22 years, data from the New York Federal Reserve showed last week. 

Even the nation’s personal savings rate — the share of disposable income people don’t spend — is ever so slowly ticking back up after plummeting from record high levels when the economy emerged from the pandemic. 

The savings rate rose for the sixth straight month in March, inching up to 5.1%. That’s still lower than average and well below the eye-popping 33.8% when COVID-19 lockdowns first crushed the economy in 2020, but more than the 3% range seen much of last year.

Some of the most unconventional ways to potentially measure an impending recession are among the least proven but nevertheless interesting to think about. 

One is the lipstick effect, said to be coined by Leonard Lauder of cosmetics company Estée Lauder during the 2001 recession. The theory is that lipstick sales rise when consumers are feeling really pinched because lipstick is a more affordable treat than many luxury items.

Another is the so-called underwear index, attributed to former Federal Reserve Chairman Alan Greenspan. This posits that men don’t buy themselves new underwear when they’re facing financial hardship because few people will ever see their skivvies. 

Both the lipstick effect and the underwear index are hard to assess and apparently haven’t held true in every recessionary period. But Target executives did say beauty items were the company’s fastest-growing segment in their first quarter, with comparable sales growing by the mid-teen percentages. (Conversely, sales of home furnishings and apparel declined and the company now expects a dip in overall comparable sales for the second quarter.) 

Generally speaking, consumers are prioritizing staples and essentials such as food and healthcare products, retailers say. 

In Walmart’s case, growth in sales of groceries and prescription drugs were particularly helpful in counteracting declines in items like electronics and clothing in its most recent quarter. The company actually raised its forecast for the year a smidge, saying sales should increase 3.5%.

In fact, companies seen as catering to wants rather than needs are proving especially vulnerable. Thirty of the 236 companies that filed for bankruptcy in the first four months of this year — companies including Bed Bath & Beyond, David’s Bridal and Party City Holdco — are in the so-called consumer discretionary sector, according to data from S&P Global Market Intelligence. No other sector tracked by S&P Global had as many filings.