ALEXANDRIA, Va.—Consumers are still spending, but they are being more selective on what and how they spend, reports CNN. July’s retail sales numbers were flat, compared with June’s revised 0.8% increase; however, retail sales excluding autos and gasoline were up 0.7%.

"In one line: If you're looking for recession, you won't find it here," wrote Ian Shepherdson of Pantheon Macroeconomics in a note to clients. "The July retail sales report made it clear that the U.S. consumer is rather more willing to spend than you might expect if you spend much time wallowing in the misery of the recession-obsessed media," he said.

Additionally, jobless claims totaled 250,000 for the week ended Aug. 13, down 2,000 from the previous week, which indicates a strong labor market.

However, eighty-five percent of consumers are altering the way they shop, reports the New York Times. Walmart, McDonald’s and other major companies report that customers are trading down.

“We know there is challenge on the lower income [consumers], but we are getting trade down out of full-service restaurants, getting trade down at fast casual, that’s helping offset any of that impact,” McDonald’s CEO Kempczinski said on a recent earnings call. “While there is going to be some shifting within the cohort, our value positioning, we expect to be a winner out of all of that.”

Walmart CEO Doug McMillon told analysts on a call with investors, that "We expect inflation to continue to influence the choices that families make, and we're adjusting to that reality so we can help them more.” McMillon said, “Regardless of the inflation level and as we work through the places we have too much inventory, we continue to make progress on our strategy."

The “too much inventory” McMillon mentions is also the story for many other retailers. Walmart’s inventory is up 25% over last year. Target’s is up 36%, and Kohl’s is up 48%.

The past two years have brought record online spending, and shoppers were willing to buy all sorts of items, which took its toll on the supply chain. In anticipation of continued spending and to get ahead of supply chain issues, companies stocked up. But then decades-high inflation hit Americans. High gasoline and food prices forced consumers to be more selective in their spending, leaving companies with more inventory than they could sell.

“The last two years was great for retailers because consumers were buying everything they had to offer,” Liza Amlani, founder of Retail Strategy Group, which works with brands on their merchandising and planning strategies, told the Times. “They just can’t do that anymore. You have to understand what the consumer wants more now than ever.”

The Times reports that on multiple earnings calls, executives are saying that lower- to middle-income consumers are the most reluctant to spend. Retailers are responding by pushing their private-label lines and offering deep discounts, and in some cases, canceling billions of dollars’ worth of orders with vendors.

"We really do see a divergence between high-income adults and middle- and low-income adults," John Leer, chief economist for Morning Consult on CNN's Early Start. "I think a lot of the spending growth that we've seen over the last year has been driven by folks making $100,000 or more per year."

Kohl’s reported that its private-label brands outperformed its brand labels and sees its shoppers buying more basic apparel that could be worn with many different outfits.

Retailers are also using discounts to get rid of inventory and entice more shoppers to spend. Target, Walmart and Ross Stores all reported that they are marking down items, some at deep discounts.

However, the Times reports that discounting doesn’t get to the root of the problem, according to some analysts.

“There is a point at which lower prices don’t trigger incremental demand because the consumers already have it,” Simeon Siegel, a managing director at BMO Capital Markets, told the Times. “It’s not an indication that the company is dead. It’s not an indication that they’re never going to buy it again. They just need the time lag.”

Siegel told the Times that retailers need to realize that customers are rethinking how they spend. Large purchases, such as patio furniture, may now only happen once for the consumers, and there is more lag time between purchases now. Someone may buy a candle every two to three months, whereas they were buying one every month over the last few years. And consumers are spending more on travel and experiences now than over the past two years.

With all of these variables, lowering prices might not trigger the demand a retailer wants, Siegel told the Times. It might simply just cut into a company’s profits.

See how convenience retailers are leveraging consumer interest in private-label brands to build loyalty in the August issue of NACS Magazine.