The US consumer is fine (but no better)

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Consumers

US economic growth has consistently surprised to the upside in the past few years, and consumers have been the driver. Real personal consumption expenditures have grown at 2.7 per cent a year over the past two years. The trend continues more or less unabated, when you look at the country in aggregate. But an undertone of caution is audible in company earnings reports and in the economic data. Spirits are not quite as high as they were a year ago. 

Exhibit one is Walmart, which reported earnings yesterday. As the reigning low-cost retailer, consumer caution helps the Arkansas giant; see its 5.3 per cent US same-store sales growth last quarter. Walmart is taking share from rivals, and executives pointed out that three-quarters of the gains were with households earning more than $100,000. Better-off consumers are trading down to Walmart (a fact the company attributes in part to improved home delivery and kerbside pick-up options: “those that have more discretionary income and want to save time are liking what we’re doing”).

The cautious consumer was a theme in almost every other big retailer report. Amazon noted that “customers [are] looking for deals and are price conscious” and some were trading down. Home Depot faces natural headwinds from low existing home sales, which drive home improvement spending. But it noted that transactions “over $1,000 were down 6.8 per cent compared to the third quarter of last year. We continue to see softer engagement in larger discretionary projects where customers typically use financing to fund the project.” Home Depot’s rival Lowe’s made the same point. 

The same theme was raised by the big auto parts chains. O’Reilly Automotive saw a weakening sales trend as summer turned to fall. CEO Brad Beckham said: 

The softness we are experiencing continues to be more pronounced in our discretionary categories such as appearance chemicals, accessories, tools and performance parts . . . this is an area where consumers can pull back when being more cautious with their spend . . . the average consumer is still reasonably healthy, but we believe is exhibiting an element of caution when managing their pocket book in an environment of uncertainty surrounding price levels

AutoZone seconded the point, saying that discretionary items had been “pretty tough for us for at least a year”.

Turning to the macro data, personal consumption expenditures continue to grow, but growth is not accelerating:

At the same time, more of that spending appears to be coming out of household savings, which are falling, albeit slowly. Total credit to households is growing at the same time.

Even with falling savings, most households’ balance sheets are still in safe territory. As Kay Herr, US chief investment officer for fixed income, currency and commodities at JPMorgan Asset Management, points out to us, income growth is growing faster than credit growth. “It’s not a source of significant [financial] pressure.”

But again, that’s in aggregate. Results from Walmart, O’Reilly and Home Depot — and, while we are at it, the presidential election — show that this is an uneven economy. Higher-income households are keeping consumption afloat and seeing their balance sheets improve, while financially strained consumers are hurting. They continue to be weighed down by high prices and are finding it harder to access financing. Jennifer Thomas, a credit portfolio manager at Loomis Sayles, told us that lenders were “not opening the pipeline” to consumers at the lower end of the credit spectrum. Auto and credit card default rates remain alarmingly high for younger consumers (though they edged down a bit in the most recent quarter). From the New York Fed:

Poorer consumers are also struggling in the housing market. Mortgage rates had started to come down, leading to a jump in issuances. Most of that jump was from consumers with higher credit scores (in light blue below). Yet, rates have ticked back up over the past month. Poor consumers remain all but locked out of the housing market:

The end may not be in sight for consumers under pressure. In the past few months inflation has hardly slowed — the path down to 2 per cent may be bumpier, and longer, than anticipated. Fed chair Jay Powell said as much last week, causing the market to pare back its expectations for a rate cut in December. If Powell is right, and inflation lingers for longer, indebted consumers will get no relief.

To emphasise, US consumers, considered as a group, are not in trouble. Indeed they are just fine. But an inflation hangover has made them a bit cautious, and those with debts and low net worth are in real distress. 

(Armstrong and Reiter)

One good read

The polls are fine (if you understand statistics).

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