The Party's (Almost) Over: Potential for $800 Billion of Consumer Spending to be in Flux Over the Next 12 Months

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Aug 29, 2023, 13:53 ET

Businesses have been asking ... what is fueling the resilient consumer? When will it change? What are the implications?

BOSTON, Aug. 29, 2023 /PRNewswire/ -- Creo Advisors' most recent analysis addresses these questions. The boutique consulting firm's Consumer Survey (n = 2,021) fielded in late July 2023 highlights a key disconnect between consumer optimism and economic headwinds. This optimism is primarily fueled by jobs and asset values. Consumers express rising optimism versus Creo Advisors November 2022 survey across all income levels as they plan to ramp up spending in Q4. Consumers' optimism contradicts traditional economic leading indicators and the situational headwinds consumers will face in the coming months, including the return of student loan payments, depletion of pandemic savings, a softer job market, and potential changes in asset values.

We believe these headwinds will impact consumers in a matter of months, placing up to $800 billion of potential spending in flux over the next 12 months as consumers reduce spending, take on greater debt, or shift spend across categories.

"We have a disconnect between consumer perspectives and economic realities. It appears the consumer will 'spend until they can't' as excess savings are depleted and new costs surface. In the intermediate-term, several factors such as interest rates and demographics will lead to slower growth. In this uncertain environment, companies need to manage cash while at the same time take this moment to pursue more structural change for growth and efficiency," says Richard Vitaro, Managing Director of Creo Advisors.

Consumer Optimism Continues to Rise

Using psychographics, we have identified 3 behavior-driven segments of optimistic, situational, and pessimistic consumers. Since our last survey in November 2022, the optimistic segment has grown by 27%. Key drivers of their optimism are job stability, and higher wages, asset values vs. 2019, and greater savings.

Optimistic consumers appear unphased by upcoming headwinds, rating comfort in their financial situation 12 months from now at 5.5 on a scale of 1-7 - 26% higher than pessimists and 5% greater than November 2022. This optimism carries further into 2025, driven by beliefs that AI will be a net positive for efficiency and convenience and that inflation will decrease over the next two years. Should factors bolstering optimism begin to weaken, optimists will likely lose confidence and slow spending through late 2023, into 2024 leading to a longer period of below-trend growth.

Holding Onto Holiday

Consumers plan to spend slightly more this upcoming holiday season while holding spending for other major events in the 2^nd half of 2023. Back to School, Halloween, and New Year's spending is anticipated to be flat, with a moderate increase for the Winter Holidays. As customers recognize the need for trade-offs, they seek to protect Winter Holidays over other events in the 2^nd half of 2023.

Category Rotation and Uncertainty

Rising optimism has led our pessimistic segment to decline 15% versus November 2022. Pessimistic respondents worry about the return of student loan obligations leading the way (65% of those concerned are pessimists) followed by cash flow and job burnout. Survey results show pessimists trading discretionary spending and savings for non-discretionary spending.

Additionally, we see meaningful rotation across categories. Spending rotations are seen in declines of luxury goods, tapering of travel and restaurants, and increases in grocery. The rise in non-discretionary spend, which accounts for more than 70% of spending, will further cannibalize discretionary categories if optimism declines in the coming months.

Beyond spending, consumers feel more disruption from recent events than November 2022 (69 v. 66, on a scale of 1-100), with more disruption over the next three years (63 v. 53) largely driven by their financial situation. Finally, in this uncertain world, we see consumers being more self-centric than last November (61% vs. 54%).

Clouds on the Horizon

Despite consumer optimism, clouds are on the horizon. 49% of those impacted by student loans will be "uncomfortable financially" or unable to pay their student loan premiums beginning in October. Additionally, 74% of all respondents say excess savings earned from the pandemic (wage increases, stimulus checks, etc.) will be depleted by the end of 2023, steadily declining from August onward. Our research shows that those who report no excess savings have reduced spending by 6% year-over-year in Q2 – a sign of what may come.

AI/Job Burnout

Respondents cite job quality as a key driver of optimism, but as this historic job market tapers, optimism and spending may be at risk. Over the past two years, open positions declined from 12 million to 8.8 million. Going forward, most respondents believe AI will impact their job, with only 25% seeing "no impact at all". Cohorts with income over $150,000 rank the impact at 68 on a scale of 1-100 while income groups below $75,000 scored a 45. Additionally, respondents express meaningful levels of job burnout, with retail and Technology / IT roles impacted the most.

"If unemployment rises and job security falls, a foundational driver for optimism is at risk. Couple this with the threat of AI on day-to-day jobs, and we may see a perfect storm of compounding headwinds causing sentiment to turn," says Owen Clark, Senior Associate at Creo Advisors.

What should companies be doing?

Companies are navigating a bullish consumer and fragile economic environment with uncertainty ahead. We believe turbulence in consumer spending will be greater than anticipated. Many companies are slowing decision making and 'sheltering-in-place' in this environment, with teams reticent to pursue value-added initiatives. Managing cash flow and costs is essential during these times. However, leading companies are also 'thinking differently' to increase market share or elevate efficiency by making meaningful, high ROI changes to their business. Leading companies are also focused on deeper consumer insights, elevating intellectual curiosity, shortening business cycles, and pursuing true organizational alignment by 'rowing together' on key priorities.

"Given current market dynamics, leading companies have maintained focus on cost management and customer service basics, while pursuing opportunities to apply automation, act on analytic insights and optimize networks to position for the future," says Steve Vielmetti, Managing Director.

About Creo Advisors

Creo Advisors is a boutique consulting firm who creates lasting change for clients. We partner with ambitious Management teams, Private Equity Firms, and Boards seeking to achieve superior financial performance. Our role is to help clients move from "insights to results" to deliver peak performance. Creo Advisors provides Strategy, Growth, Supply Chain, and Human Capital services to companies across multiple industries. Please visit our website at www.creoadvisorsllc.com and follow us on LinkedIn.

For more information, please contact Creo Advisors at: [email protected]

SOURCE Creo Advisors LLC