Retailers are bracing for tougher times and more frugal customers in 2023

January is typically an overlooked month for retailers.

Shoppers do returns and exchanges. They come to stores with gift cards in hand. And they can spring for workout clothes or other items to follow New Year’s resolutions.

But this year, there’s more at stake in January. The coming weeks, which close many retailers’ fiscal year, could help determine whether the holiday quarter is a win or a failure. It’s also an important time to help stores clear excess inventory. January could also set the tone for 2023, when some economists and retail observers expect the US to slide into recession.

So far, early holiday results have been better than some economists and retailers had feared. Sales from Nov. 1 to Dec. 24 were up 7.6%, according to data from MasterCard SpendingPulse, which measures in-store and online retail sales across all forms of payment. The figure includes restaurants and is not adjusted for inflation, which rose 7.1% year over year in November.

Still, there are signs that shoppers may be running out of gas. Credit card balances have run out. The personal savings rate has fallen. And sales of expensive items such as jewelry and electronics have declined.

In addition, spending by Americans during the early years of the pandemic, fueled by stimulus money, boredom and hoarded savings, has made comparisons difficult.

Retailers are entering 2023 bearing in mind that retail traffic has already lagged during the peak weeks of the holiday season.

At six retailers – Walmart, Target, Best Buy, Nordstrom, Kohl’s and Macy’s – foot traffic fell an average of 3.22% year over year during the weeks from Black Friday through the week of Christmas, according to data from Placer.ai, an analytics company that uses anonymized data from mobile devices to estimate the total number of visits to locations. It was also down nearly 5% compared to pre-pandemic patterns.

Now retailers are more tense.

“It seems like a lot of brands are expecting a bigger thud in January,” said Stacey Widlitz, president of SW Retail Advisors, a consulting firm.

She’s noticed more retailers dangling gift cards to boost sales. For example, Urban Outfitters-owned retail chain Anthropologie offered $50 toward a future purchase on Friday for online shoppers who spend $200 or more. But that bonus money must be used on Jan. 31, when the company’s quarter ends.

Widlitz said those offers are aimed at encouraging shoppers to make purchases at a time when there is often a post-holiday lull. It’s also the last chance for retailers to sell excess inventory and start the new fiscal year on a cleaner note.

“It looks like they’re trying to get people to go into stores after the new year,” she said.

But for some, a more budget-sensitive consumer could be an opportunity.

During an income interview last month, walmart CEO Doug McMillon said he expects an increase in sales as consumers feel stretched by their holiday spending. Like many other retailers, Walmart’s holiday quarter also includes January.

“Sometimes these quarters work out where the end of December and January are stronger when people are particularly price sensitive,” he said. “So that’s kind of what I expect.”

The discounter has already attracted wealthier customers with its cheaper groceries and household items. Over the past two quarters, about 75% of food market share gains have come from households making more than $100,000 a year.

Just like competitors Target and Costcohas had a harder time selling discretionary goods that tend to generate higher profits than selling milk or paper towels.

Economists are watching consumer indicators closely at the start of the year.

On the upside, said Michael Zdinak, an economist at S&P Global Market Intelligence, unemployment is low and the labor market is still very tight. There are signs that inflation has cooled and prices rose less than expected in November, the most recent month of available federal data.

On the other hand, he said food prices are still high, retail demand is weakening and savings don’t look as robust.

The personal savings rate has fallen sharply. According to the US Bureau of Economic Analysis, the percentage of disposable income that people save was 2.4% in November. That’s less than a pre-pandemic average of 6.3%, according to S&P Global Market Intelligence, which summarized numbers from 1991 to 2019.

Zdinak said low interest rates are unsustainable, especially as consumers spent money they deposited in their savings accounts during the early months and years of the pandemic.

Economists at the market data company expect a recession to begin in the first quarter of 2023 and to last for two quarters.

Zdinak said the downturn will be fueled by reduced orders and less production as many retailers clear unwanted inventory after consumer preferences changed abruptly in 2022.

Then there is a headwind for the consumer. The reality may soon hit families who have exhausted the budget on gifts or holiday travel, said Widlitz of SW Retail Advisors.

“Everyone is going through the holidays in denial and February 1, when you get your [credit card] statement, or January 15, when it comes, it’s like, ‘Oh!’” she said.

— Caitlyn Freda contributed to this report.