American consumers may have reached their spending limit, retail industry outlook is grim.

In recent years, American consumers have been facing economic pressure from high prices, but their purchasing power is not unlimited. Wall Street is beginning to worry that consumers may be approaching their spending limits. The latest inflation data has further fueled market concerns. Data released this Wednesday showed that the inflation rate in the United States reached 3% in January, the first increase in seven months. This news led to a temporary overall decline in the stock market. Since the US economy relies heavily on consumer spending, if consumer confidence weakens, investors will face greater risks. Especially retail and consumer goods industries will be hit hard. Investor anxiety is also reflected in market performance, with the S&P 500 index rising nearly 2% so far this year, while the SPDR S&P Retail Exchange-Traded Fund (ETF) fell by the same margin. In the past few years, rising stock markets, increasing personal savings, and a strong job market have helped consumers withstand inflation pressures. Although the Federal Reserve's 2% inflation target has not been met, US retail sales remain strong, especially during the 2024 holiday shopping season. However, analysts caution that retail prospects for 2025 are more uncertain, with changes in Washington's policies potentially becoming a major variable. President Trump's tariff policy remains uncertain, but if higher tariffs are imposed on imported goods from countries like China, prices will rise further. Additionally, if deportation rates increase, labor shortages could push up business labor costs. Tax issues also pose uncertainties. Several provisions in the Tax Cuts and Jobs Act are set to expire this year, such as adjustments to standard deductions. Additionally, the government's current budget only extends to March 14, when the debt ceiling issue may once again become a market focus. Chris Krueger of TD Cowen's Washington Research Group warned in a podcast that this issue could soon dominate headlines. In addition to inflation pressures, individual risks in the retail industry should also be noted. Last week, investment bank Jefferies warned that US retail industry inventories rose for the first time in two years and could exceed sales volume. The last time this happened, the retail industry's profit margins and performance guidance were severely impacted. Jefferies analyst Randal Konik stated on Wednesday that a stronger dollar poses a challenge to non-essential consumer goods companies with international businesses. More worrisome is that there will be an extra sales week in 2024, making year-over-year performance comparisons in 2025 more difficult. Furthermore, there may be a decrease in mall foot traffic. Jefferies data shows a downward trend in mall traffic in December 2024. Despite mall foot traffic remaining above average levels since the COVID-19 pandemic, it may now be returning to normal levels. A decrease in mall foot traffic typically indicates that consumers are more price-conscious and inclined to buy more cost-effective products. Konik pointed out that although overall consumer health is good, their spending behavior is becoming more selective. He cited recent survey data from Synchrony Financial indicating that consumers prioritize purchasing essentials and reduce spending on non-essential big-ticket items. Additionally, due to years of price increases, businesses' pricing power is starting to weaken. Max Rakhlenko of TD Cowen is cautious about the short-term outlook for expensive items like high-end furniture and auto parts. From a technical standpoint, Jonathan Krinsky of BTIG has identified a concerning signal: non-essential consumer goods stocks are weak, while essential consumer goods stocks are performing strongly. Krinsky explained that the price-to-stock ratio of non-essential goods to essential goods is typically an important indicator of consumer health. If this ratio continues to lean towards essential goods, especially in equal-weighted calculations, it will be a negative signal. The retail sales data to be released this Friday will provide new consumption signals. However, Aditya Bhave, an economist at Bank of America, warned that this data may not be particularly strong. Bank of America's credit card data shows that monthly household spending in the US decreased by 0.4% in January (seasonally adjusted). In addition, some consumers may be stocking up on goods early in anticipation of potential future tariff increases, which could slow down sales in certain categories in the future. Despite facing many challenges, investors do not need to panic excessively. Firstly, a Congress controlled by the Republican Party may extend some tax provisions of the Tax Cuts and Jobs Act. Secondly, while demand for high-end commodities is declining, sales of other goods remain stable. John Kernan, an analyst at TD Cowen, pointed out that retail sales data is still higher than the average level of the past 25 years, indicating that consumer spending remains robust. Meanwhile, improvements in credit default rates and the resilience of the job market also provide support. "The overall condition of consumers is still strong," Kernan said. "We should remain positive about consumer confidence." Bank of America also believes that the decline in January consumption data may be a temporary phenomenon rather than a turning point in the trend. The institution believes that the wildfires and snowstorms in January may have been the main reasons for the decline in consumption. Considering the health of household balance sheets and the stability of the job market, the current data likely reflects an adjustment in consumption structure rather than an overall decline in consumption capability.