San Francisco Frontiers - US consumers remain resilient even as prices rise

Home Depot, however, benefitted from the ongoing spending spree, reporting higher profits and a better outlook for the year.

The reports come amid rising fears of recession in the wake of a 40-year peak in inflation that has prompted the Federal Reserve to raise borrowing costs aggressively to cool the economy and tamp down price pressures.

The healthy US consumer has underpinned the strong recovery in the world's largest economy following the slowdown in the early months of the Covid-19 pandemic, but the surge in demand also has strained supply chains and helped push inflation to its fastest rate since the early 1980s.

Fed Chair Jerome Powell said Tuesday the central bank wants to see slowing growth and "clear" evidence inflation is coming down before it pulls back on efforts to cool the economy, and acknowledged that it may be a "bumpy" ride that would inflict some pain.

Consumers haven't pulled back yet, and US retail sales rose 0.9 percent in April, boosted by a rebound in auto sales and increases in other categories, including electronics, home furnishings and restaurants, according to Commerce Department data.

The report "is encouraging because it shows consumers are taking higher prices in stride and remain resilient," said Jack Kleinhenz, chief economist of the National Retail Federation.

But prices continue to rise, and the cost of gas at the pump hit a record in May as the war in Ukraine pushes oil prices higher.

"Consumers' tolerance to high inflation will continue to be tested and the renewed spike in gasoline prices, along with tighter financial conditions, will weigh on households' willingness to spend on big-ticket items," said Kathy Bostjancic, a chief US economist at Oxford Economics.

The Fed has gone to battle to try to cool price pressures, announcing earlier this month the biggest interest rate increase since 2000.

Powell said reducing inflation is critical, which means bringing down red-hot demand more in line with supply, and additional sharp rate hikes are "on the table" in June and July.

"What we need is to see... growth moving down from the very high levels that we saw last year, moving down to a level that's still positive," Powell said at an event with The Wall Street Journal.

And if that doesn't happen, "then we'll have to consider moving more aggressively," he said.

- Labor, fuel costs rise -

Walmart executives pointed to a series of cost hits that converged in the quarter ending April 30, as the retail giant reported a 25 percent drop in profits to $2.1 billion -- $1.30 a share, below the $1.48 expected by analysts -- as revenues rose 2.4 percent to $141.6 billion.

Walmart raised its full-year sales forecast slightly but lowered its profit forecast. It now expects earnings per share to fall one percent after previously projecting an increase in the mid-single digits.

The company cited higher labor costs and a spike in energy costs when the Russian invasion of Ukraine sent oil prices soaring.

Another obstacle was a March fire that destroyed a warehouse in Indianapolis, Indiana.

Walmart US President John Furner said the company is seeing a "wide range" of responses from shoppers to the rise in prices.

While there is continued strong demand for pricey items such as game consoles and outdoor grills, he said some consumers are moving away from brand names in favor of Walmart's own branded goods, which are lower-priced.

"We need to do more to control costs, to make sure we can provide good value for our customers," Furner said on an earnings conference call.

- Investing in homes -

In contrast, Home Depot raised its outlook after reporting that first-quarter profits rose two percent to $4.2 billion on a four percent increase in revenues, as executives with the home-improvement chain said consumers appeared to take higher prices in stride.

The spending has been propelled by a strong trend toward increased investment as homes increase in value, according to Chief Financial Officer Richard McPhail.

Walmart shares plunged 11.4 percent, while fellow Dow member Home Depot rose 1.7 percent.

W.Carter--SFF