Juggling Dynamite

Last week, Costco joined the long line of retail bellwethers sounding the alarm on recessionary trends in consumer spending. It’s everywhere. It’s everywhere. See What Costco’s baskets reveal about consumer finances, to wit:

The latest evidence came from Costco whose average customer tends to be higher income. The retailer on Thursday said comparable sales excluding fuel in constant currency rose 3.5% in the quarter ended May 7 compared with a year earlier—lower than the 4.2% growth Wall Street analysts expected. It was also the weakest comparable sales growth Costco has seen since 2017. This follows Dollar Tree reporting more business from shoppers who earn annual incomes of $80,000 or more in its stores. Those shoppers weren’t looking for party favors or tchotchkes; they were putting everyday necessities in their basket. Likewise, Walmart last week said that it continues to gain grocery market share among higher-income shoppers.

While shoppers still love going to Costco—traffic at its stores rose 4.8% globally and memberships grew 7%—they are walking out with smaller receipts. The average daily transaction declined 4.2% as shoppers bought fewer big-ticket discretionary items…

Costco’s baskets reveal that consumers are looking for ways to save on necessities. Chief Financial Officer Richard Galanti said on Thursday’s earnings call that sales have shifted from beef to poultry and pork, a trend the company historically sees during recessions. Some are even switching to canned products such as chicken and tuna. The share of sales that came from its Kirkland Signature private brand rose 1.2 percentage points last quarter—much faster than the pace of private label share growth it has seen historically. Interestingly, Galanti said customers bought apparel “in a big way,” which could mean more higher-income consumers are trading down from department stores.

The latest CMHC report notes that Canadian household debt totalled 107% of the country’s economic output at the end of 2021–the highest of any G7 country–and up from 95% in 2010 and 80% in 2007. Household debt has risen since 2021 and amounted to 180% of disposable income at the end of 2022. Mortgages account for some 75% of household debt. The weight of this debt will suppress household spending for years to come.

Fortunately, we do have bankruptcy provisions in Canada which allow consumers to escape unpayable debt burdens. Bankruptcy trustees are already reporting a 36% surge in Canadian household insolvency filings year over year, and they expect the trend to continue over the next few years. Bankruptcy trustees are the undertakers that help clear out the dead money of bad financial decisions.

In China, no such relief exists. The video below gives a glimpse at the costs now compounding after 12 years of mindless debt addition and over-allocation to real estate. The themes are universal in terms of behaviours and conditions now reversing around the world. Sad to see, but big lessons can be learned for those who are astute.

China’s economy is experiencing the sharpest downturn in nearly 40 years. Many home buyers can no longer afford their mortgages, and more and more people are defaulting on their monthly payments. This trend is growing. But, we have noted that the “Lehman moment” hasn’t happened in China. Why is that? In 2008, a wave of defaulted mortgages in the United States triggered a financial tsunami. Yet, in China, we haven’t seen any large-scale bank failure. It seems to be a good thing on the surface. But if one looks deeper, one will feel sorry for the Chinese people. They have borne the heavy burden of decades of government mistakes and the huge risks the state is facing. And many, many Chinese have been driven to their breaking point. Here is a direct video link.

Danielle appeared on CBC’s Weekend Business Panel talking about the CMHC report on Canadian household debt levels, AI mania and the US debt ceiling.

Here is a direct video link.