Even a 100 BPS Cut Won't Be Enough to Save Distressed Consumers
Signs of increasing consumer distress are becoming widespread and there's little Jerome Powell and the Fed can do.
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Doug Kass, in returning to TheStreet Pro's Daily Diary on Wednesday after a well-deserved break to Normandy, posted a tweet from the CEO of Hedgeye that noted that the cumulative inflation of the last three years is crushing at least two-thirds of Americans.
I personally would say the number affected is closer to three quarters of households. However, I am glad Dougie is focused on the increasing distress on the consumer, a topic I believe gets too short of shrift from the financial media.
The last couple of quarters we have seen both Home Depot HD and Lowe’s Companies LOW note the increasing reluctance of consumers to make purchases of "big ticket" items and that they are postponing major renovation projects as key reasons why their results have been tepid. McDonald’s Corporation MCD, Burger King, KFC and Subway have brought back value meal options with a vengeance this summer to drive store traffic. Starbucks SBUX poached the well-regarded leader of Chipotle Mexican Grill CMG earlier this month to try to address its sales growth issues.
My favorite description of the consumer so far this cycle has come from the CEO of Macy’s M following the company’s big revenue missed in the second quarter on Wednesday. Trying to explain how sales came in lower than expected even as foot traffic was constant, Macy’s leader stated the consumer seems "distracted" at the moment. I probably would have gone with "challenged," "tapped out" or "increasingly frugal" myself, but I will give the leader of Macy’s a B+ for creativity at least.
Middle- and lower-income consumers have been under increasing pressure for many quarters now. However, we are starting to see the high-income consumer start to face some of the same duress. Over 40% of this week’s massive 818,000 position "revision" to 2023 job creation numbers came from the higher-income professional services category. CNBC also noted that travel demand has started to ebb after years of robust growth.
Another clue that spending might be slowing down with the upper-end consumer came Thursday when high-end retailer William Sonoma WSM reported Q2 results that missed top-line expectations. Sales fell nearly 4% on a year-over-year basis, led by a just over 7% revenue decline from its Pottery Barn division. Management also lowered forward revenue guidance for FY2024. The stock was down just over 9% in trading yesterday as a result. Earlier this week, Bank of America downgraded American Express AXP and cited ebbing billings growth as one of the reasons for the ratings action.
All eyes today will be on Chairman Powell’s commentary from Jackson Hole. However, I am growing more and more concerned about the state of the increasingly challenged American consumer. The market will likely cheer any new clues that a series of interest rates are on the way starting with the September FOMC meeting. Unfortunately, 50 BPS or even 100 BPS of reductions to the Fed funds rates will only help the struggling consumer marginally. And consumer spending does drive approximately two-thirds of economic activity in the United States, after all.
At the time of publication, Jensen had no positions in any securities mentioned.
