Consumer spending and the stock market
Consumer spending is the lifeblood of the Philippine economy, which contributes about 70 percent of the country’s gross national product. According to Keynesian economics, a theory developed by economist John Maynard Keynes, growth is primarily driven by how much money is being spent in the economy.
When consumer spending slows down, businesses earn less revenue, which leads them to cut back on investments and hiring. As a result, incomes drop, which decreases spending even further. This cycle, known as the “multiplier effect,” can create a chain reaction that can push the economy toward contraction.
Over the past three years, this pattern has become more evident. After the economy reopened in 2022, consumer spending initially grew by a strong 14 percent in the first three quarters. By 2023, however, growth had slowed to 12 percent, and last year it dropped further to just 8 percent.
This slowdown raises important questions about the fundamental shifts in spending behaviors, considering how financial priorities and habits have changed in recent years.
To understand this trend deeper, we can examine how spending patterns have evolved before and after the pandemic by looking at the changes in marginal propensity to consume (MPC) of the economy.
The MPC is the ratio of the change in consumption to the change in income, which shows how much of every additional peso earned is spent on goods and services, rather than saved. For example, if household income increases by P1,000 and they spend P800 of it on consumption, the MPC would be 0.8, indicating that 80 percent of their additional income is spent while the remaining 20 percent is saved.
Now, when we examine the quarterly changes in the marginal propensity to consume (MPC) before the pandemic, we will find that households spent about 58.6 percent of their income in the first quarter each year.
This share would drop to 35.9 percent in the second quarter and decline further to 17 percent in the third quarter, possibly as households focused on saving or repaying debts. However, by the fourth quarter, household spending rose sharply to 69.7 percent, driven primarily by increased expenses during the holiday season.
These prepandemic spending patterns provide a stark contrast to the shifts observed in recent years. Since 2022, postpandemic spending patterns have taken noticeable changes. Households now spend just 54.4 percent of their income in the first quarter, which is lower than prepandemic averages.
The real surprise comes in the second and third quarters, where spending falls into negative territory—at -16 percent and -141.2 percent, respectively. By the fourth quarter, spending recovers to 61 percent, but even this rebound remains below prepandemic levels.
The negative MPC is a red flag for any economy. It signals that households are not just cutting back on spending but are actively reducing their consumption by dipping into savings or accumulating more debt.
This prolonged slowdown in the MPC is evident in the sales and earnings performance of Philippine Stock Exchange-listed companies in the retail sector.
For this analysis, we identified 14 companies in the sector: All Day, All Home, Figaro, Fruitas, Jollibee, Keepers, Max’s, Philippine Seven, Puregold, Robinsons Retail, SSI, Shakey’s, Upson and Wilcon.
In 2022, the total sales of the retail sector, which recovered after the pandemic, showed a median growth rate of 33.1 percent. However, by 2023, this growth rate dropped significantly to 16.4 percent, roughly half of the previous year’s growth. Last year, the 12-month trailing sales of the sector rose by only 9 percent, almost halving the growth of the prior year.
The slowing sales growth in the sector is reflected not only in its earnings performance but also in its stock valuations. The median earnings growth rate, based on 12-month trailing income, dropped from 12.2 percent in 2022 to just 6.2 percent in 2024. At the same time, the sector’s median price-to-earnings (P/E) ratio declined sharply from 13.5 times to 8.4 times.
Similarly, the sales and earnings performance of manufacturers in the food and beverage sector—such as Century Pacific, Emperador, Ginebra, Monde, RFM, San Miguel and URC—shows a similar downward trend.
The sector’s median sales growth declined significantly from 14.1 percent in 2022 to just 3.8 percent in 2024. This slowdown in sales has also impacted profitability, with median earnings growth dropping sharply from 6.6 percent in 2022 to -9.5 percent in 2024.
These trends reveal a deeper concern, as the impact of slowing consumer spending extends beyond the retail sector to the broad economy. If this pattern persists, the growing risk of a recession could weigh on retail stocks and potentially lead to declines in other sectors, which could increase overall market volatility.
Slowing consumer spending is more than just a symptom of economic strain; it is an indicator of underlying weaknesses that can lead to a recession.
In an economy where consumption drives the majority of activity, a slowdown in spending signals growing risks. High interest rates, weaker remittance growth and elevated inflation point to mounting economic challenges.
