Consumer Psychology Has Kept Retail Strong, But Soon Financial Reality Will Hit

Consumer psychology

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The National Retail Federation (NRF) is out with its 2023 retail forecast; on its face, it’s reassuring.

In an hour-long briefing, NRF president and CEO Matthew Shay reported that retail sales will grow between 4% and 6% in 2023, not including motor vehicles, gasoline stations and restaurants. And this rate of growth is better than the 3.6% average annual growth rate seen in the pre-pandemic from 2013 through 2019.

“While we expect growth to moderate in the year ahead, it will remain positive as retail sales stabilize to more historical levels,” he said.

It wasn’t until 20 minutes in and NRF chief economist Jack Kleinhenz took the virtual stage that the generally mild and sunny forecast turned cloudy and much more realistic. He was joined by economists Kathy Bostnjanic of Nationwide and Gregory Daco of Ernst & Young.

“The economy proved pretty resilient in the second half of 2022,” Kleinheinz said. “Looking forward, the resilience looks to be short-lived as the blue-chip consensus forecast for GDP is around 1%. That’s about half of 2022’s rate of growth.”

Recession Watch

At least through the first quarter 2023, consumer retail spending is holding up, but Kleinheinz also said many of the data points factored into the retail forecast are going in the wrong direction, like slowing job growth, rising unemployment and higher credit interest rates. Plus, nagging inflation will continue to take a bigger share of consumers’ wallets.

He also acknowledged that “recent developments in the financial markets and banking sector, as well as some unresolved public policy issues, complicate the outlook,” adding, “There is a significant number of unknowns going into this year. Our outlook for the year reflects a lot of moving parts.”

Then he turned to Bostjanic, who said she had been seeing a moderate recession on the horizon. But with things moving so fast, the economy may be in for a harder landing, or “a more typical recession than just a moderate one,” she said.

Daco added that the household financial situation is “showing some cracks underneath the foundation,” noting rising delinquencies and consumers turning to credit purchases to offset inflation.

“We are going to be in an environment of slower growth where a recession is increasingly likely,” he said. Regarding the impact on consumers, he said, “We’re still going to see this burden of inflation and high-interest rates weighing on their ability to spend.”

Closing the economic portion of the presentation, Kleinheinz concluded, “In all my years of forecasting, this has been one of the more challenging periods for putting together the data and connecting today’s economy with the future economy.”

In other words, the sky’s not falling yet, but it could fall soon. And amidst the economic forecast predicated on quantifiable factors such as employment, wages, consumer confidence, disposable income, consumer credit, previous retail sales and weather, the weight of consumer confidence will play the biggest part in the equation.

Factoring The Human Equation

After all, the consumers are the ones who will ultimately determine retails’ fate in 2023. For that, we need to turn to the soft science of consumer psychology, not economists’ hard science.

People seem to be spending against their better interests in the face of so much economic uncertainty and very real and quantifiable measures of how much inflation is costing them.

So I turned to consumer psychologist Chris Gray, Psy.D, founder of Buycology, after more than a decade as vice president Saatchi & Saatchi of its shopper psychology team, to get the low down.

He said people’s innate cognitive biases are an underlying factor that is keeping retail sales strong for now. And he also noted that cognitive biases may be playing a part in how the economic experts are reading the data, even though they are trained to watch for its effects.

“Our brains are very efficient machines. They are always trying to find shortcuts that’s where heuristics and biases come in. They often do us more good than harm, but they can go wrong. We all have them, so it’s important to be aware of them,” he said.

Blind Spot Bias

The blind spot bias is where people believe they are less biased and more objective than others, so they cannot see how their cognitive biases may be impacting their judgment and decision-making.

This can lead consumers to believe they are handling their finances well and making better choices than others.

“We are actually better at predicting other people’s behavior in the future than our own. We’re terrible at it,” Gray said, adding that the first thing learned when studying psychology is that people aren’t rational.

Optimism Bias And The Ostrich Effect

Blind spot bias is aided and abated by optimism bias and its partner-in-crime, the ostrich effect. The ostrich effect is a cognitive bias where we avoid unpleasant or negative information. The optimism bias is our tendency to see things in a positive light. We want to feel good and avoid anxiety that makes us feel bad.

The two work in tandem but with a different focus. Optimism bias is where we focus on being optimistic and not allowing negative things in. The ostrich effect is going away from or avoiding negative information.

“Working together, optimism bias and the ostrich effect can have negative consequences because we aren’t allowing in information that contradicts us or makes us feel bad,” Gary shared.

This can lead people to pile on debt and overspend to maintain the positive feelings that comes from making higher-priced discretionary purchases that satisfy our emotional desires, as opposed to day-to-day necessity purchases that don’t have the emotional payoff. But these everyday expenses cost more due to inflation and is stretching many people’s budgets to the breaking point.

“People are trying to hang on to their comforts, status and identity at the expense of their financial situation,” he observed. “Our perception is not keeping up with reality.”

Confirmation Bias

In the face of conflicting news, confirmation bias keeps people feeling safe and secure. Confirmation bias is our tendency to pay attention to information that confirms what we already think and believe and tune out information that disputes or challenges our beliefs.

“This can be really dangerous because it undermines our ability to adjust to changing circumstances and to take in new information about what is happening that can threaten us,” Gray said.

“Our brains operate so that short-term gains always outweigh the long-term benefits. We put too much weight on how we currently feel and assume it will continue. We see we are racking up debt, but figure this is a temporary blip. Everything will be fine in the end.”

Anchor Bias

Finally our innate anchor bias, the tendency to be overinfluenced by the first piece of information received, keeps the perceived good times rolling. We’ve heard for years the economy is sound and all’s well in the world.

And our confirmation and optimism biases keep us hearing only that news, while the ostrich effect keeps us from looking objectively at our financial situation and how our shopping behaviors today could negatively affect us down the road.

“When our financial situation changes, especially when they are changing as rapidly as now, it’s very difficult for us to keep up from a cognitive standpoint. It takes effort to slow down and objectively assess our finances and make better decisions for our long term financial health. The way our brains work makes it hard,” he said.

“People are very good a fooling themselves and believing everything is okay, but sooner rather than later reality is going to catch up.”

Don’t Be Blinded By Biases

On a positive note, the retail industry can be encouraged by how forthcoming Kleinheinz was about the troubles ahead and his promise: “We are going to closely monitor the situation and we’ll keep you updated as conditions change.”

At the same time, Shay anchored the NRF presentation with the optimistic forecast that retail sales will grow between 4% to 6% and reach between $5.13 trillion and $5.23 trillion in 2023.

Word of advice: don’t let your cognitive biases cloud you to what’s coming. Consumers are going to hit the wall soon and when they do, so will retail. We are headed for another round of tremendous challenges that will put all to the test. Get ready for it.