The Haves and Have Nots of This Economy
This is one of the most confounding U.S. economies that I can remember in my lifetime. In my ecosystem of friends and acquaintances, those that are poor, middle class or even upper middle class seem to be increasingly struggling as costs for rent, gas, auto insurance, health care bills and restaurant tabs have soared in recent years.
Most are cutting back expenses, going out to eat less and paring back vacation plans. My neighbor behind me has decided not to take his annual trek to Disney World this summer with his 12-year-old daughter as business has been down this year and theme park prices have risen noticeably since the pandemic. Another buddy with two kids has recently made a similar decision.
Meanwhile, my affluent friends might as well be living in the Booming 90s. Yes, property taxes, car prices and hurricane insurance have risen steeply and occasionally draw their ire. However, that has been more than been offset by huge gains in their stock portfolios and real estate thanks to asset inflation. They also continue to enjoy 3% mortgage rates on their primary abode as well.
It seems to be the same thing across Delray Beach, Florida. Two of the few moderately priced restaurants along the strip have closed over the past six months after doing business for more than 15 years. They just couldn’t afford the rents on new leases which were more than double their previous rates. Meanwhile, it is still tough to get a seat at most of the high-end restaurants that line Atlantic Avenue on most nights.
We have seen this bifurcation across first quarter earnings reports this season with Starbucks (SBUX) , McDonald’s (MCD) and Yun Brands (YUM) all noting their consumer bases have weakened.
Airlines have done well during the first quarter as business travel has remained strong. Meanwhile, on the other end of the spectrum in travel, Airbnb (ABNB) just posted tepid forward guidance, Tripadvisor (TRIP) continues to struggle and the VRBO division of Expedia (EXPE) dragged down results there.
JP Morgan Chase (JPM) is managing to skirt the unfolding CRE debacle while many regional and community banks have become increasingly ensnared in it. Charge off and delinquency rates among its higher end credit card holders are also much lower than at Capitol One (COF) and Bread Financial (BFH) which have more pedestrian consumer bases. The same can be said for American Express (AXP) whose high-end customer is showing little stress.
I expect this bifurcation to continue in the months and quarters ahead. Lower- and middle-income consumers are increasing tapped out and the personal savings rate is near historical lows.
In addition, the jobs market seems to be softening. The March JOLTs report showed the fewest job openings in three years, the ‘quit’ rate was the lowest since the aftermath of the pandemic and weekly jobless claims just hit their highest levels since August.
In short, it looks like it will continue to be a ‘Have’ and ‘Have Not’ economy. Invest accordingly.
At the time of publication, Bret Jensen had no position in the securities mentioned.