Unemployment and consumer spending are hot topics in the United States, as investors anticipate next week’s Fed rate cuts. Ryan Bridge talks with Milford Senior Investment Analyst Stephanie Batchelor about the key metrics indicating a slow down in US consumer spending, and what it means for consumers here in NZ.
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Bridge talks Business: 10 September 2024
Episode Transcript
Ryan Bridge
Kia ora, I’m Ryan Bridge, welcome to episode five of Bridge talks Business with Milford. Like and subscribe to get next week’s episode delivered straight to your front door. Speaking of deliveries, if you’re like me and you’re a big McDonald’s fan, stay tuned to find out what’s prompting the global fast food giant to offer customers new meal deals. But first, the top five business bits from the past seven days.
- The US Labour market data came in right on the screws – not too hot and not too cold – which is keeping investors guessing how big the Fed’s rate cut might be next week – a quarter or a halfie?
- Staying Stateside … stocks are struggling after ‘awkward August’ where volatility reigned. Tech shares still battling after that Nvidia result a few weeks ago.
- Prediction markets are tightening up as the US election looms. Expect swings in expectations to continue as debates and noise really start ramping up this week.
- Across the ditch… The Aussies hit GDP growth for the second quarter of a steady 1% on year ago. Compare that to an expected 0.8% for NZ and the US tickity boo at 2.5%.
- At number five, the European central bank is tipped to cut rates a quarter of a percent this week … a welcome distraction from the focus on US inflation data.
This episode we are doing a deep dive on consumer spending in the United States. It’s a key driver of the economy there, a great gauge of the health of the economy, driving 70% of GDP.
Now just a reminder, this segment is informational only and should not be considered financial advice. I am delighted to have Stephanie Batchelor, a Senior Analyst at Milford with me on today’s show. G’day.
Stephanie Batchelor
Hello.
Ryan Bridge
Good to have you here, Steph. So, tell us – we’ll start with this jobs report first of all. It was mixed. Why is it being described as mixed?
Stephanie Batchelor
So, there were positives and negatives. On the negative side, the number of jobs added in August came in weaker than expected. And they also revised down the number of jobs that were added in June and July. So, then if you look over the three months, we’re now at the slowest pace of hiring since the onset of the pandemic. But then on the positive side, the unemployment rate actually ticked down slightly, and wage growth came in slightly stronger than expected.
Ryan Bridge
Quite counterintuitive, no wonder it’s been described as mixed. The markets had quite a sell off on Friday, down 1.7% – have peered back slightly – was that a significant reaction?
Stephanie Batchelor
Yeah, down 1.7% is significant. And on top of that, every day last week was negative. So, it actually ended up being the worst week since the 2023 regional banking crisis. But although it was a weak report, it potentially wasn’t weak enough to make the Fed want to jump from a 25 basis point cut to a 50 basis point cut in September. But it’s also not off the table. So, it is a little bit mixed at the moment. And then we had a few Fed speakers come out over the weekend, and they really reiterated what Jerome Powell has said. They acknowledged that the labour market is cooling, but it’s still reasonably healthy. They said there’s not meaningful layoffs. It doesn’t look like the US economy is headed for a recession, but they’re going to remain data dependent. And if the data weakens significantly, then they’ll review the pace and the size of interest rate cuts.
Ryan Bridge
In my mind, why don’t you just go for a 50, you know, a half, rather than a quarter. But I guess they have to wait and see. And I guess it also explains the volatility in the markets and the reaction. It’s mixed. It’s uncertain.
Stephanie Batchelor
And it is a really fine line as well, because if they cut too much too quickly, they risk kick-starting the economy and having inflation tick higher. And that’s what they’ve spent the last couple of years really trying to tackle. But then if they wait too long or they don’t cut enough, that’s when consumers continue to rein in spending. You start to see companies be impacted. They pull back on hiring. They might even start laying off workers. And then you’re getting closer to that recession scenario.
Ryan Bridge
So, it’s a tightrope that they’re trying to walk.
Stephanie Batchelor
It is.
Ryan Bridge
What about some of the other metrics, like savings for consumers, and debt – those sorts of things? What are they telling us about the health of the consumer?
Stephanie Batchelor
There’s a lot of other metrics that we can look at to work out the health of the US consumer. Retail spending, for example, it has come down lower. More so on the goods side, whereas the services spending side is actually still quite strong. But it is just normalising to more of a historic trend level of around 2%. It’s not falling off a cliff. Wage growth is moderating, but inflation is also coming down. So, we still do have real wage growth, and that’s generally supportive for spend. And then you mentioned excess savings. There’s a lot of talk out there saying, you know, all the excess savings from Covid are now spent. But it’s important to keep in mind, households have built up an enormous amount of assets over this time. Covid was the first recession where wealth actually increased rather than decreased. So, since 2019, house prices are up kind of 50%. Equity markets are up 70%. And then on top of that, debt obligations are still remarkably low. A lot of homeowners in the US fixed their mortgage rates at around the 4% level, so debt obligations are low. The one area where debt has picked up a little bit is in that lower income consumer. So, things like auto loans and credit card debt. So, that’s something to keep an eye on.
Ryan Bridge
Things you need. And if you’re on a lower income or if you’re on a fixed income, you need to borrow to have to survive, right?
Stephanie Batchelor
Exactly. So, overall, the health of the US consumer is cooling, but we’d say it’s still on reasonably solid footing.
Ryan Bridge
As an analyst, you’re obviously looking at the big US companies and getting a sense from them about their view on the consumer and how they’re faring. What is their messaging being?
Stephanie Batchelor
It’s mixed as well. I keep coming back to that. But if we look at some of the bellwethers, so these are companies that provide quite a good read through on the economy. Take Walmart. It’s the largest retailer globally. They actually had a fantastic result. But they did say that the consumer is more choiceful, value-seeking and focused on the essentials. On a positive note, they did say that they’re not seeing any incremental fraying of their consumers’ financial health. And then we could look at names like Visa and MasterCard. Visa said they are seeing weakness in that lower income consumer, whereas MasterCard was a little bit more upbeat. They said that irrespective of income cohort, they see the consumer as quite well supported, backed by that strong labour market.
Ryan Bridge
Alright, now is my favorite part of the interview because I know you’re going to talk about a big company, which I’m a big fan of, and that is McDonald’s. First of all, most important question, what do you get at the drive through, Steph?
Stephanie Batchelor
It’s embarrassing, but I get a fillet of fish.
Ryan Bridge
Really?
Stephanie Batchelor
Yeah, it’s interesting.
Ryan Bridge
That’s really weird.
Stephanie Batchelor
It is an interesting choice. What do you get?
Ryan Bridge
I get a McChicken. I used to be a fillet of fish. Fillet of fish, fillet of fish? I don’t know.
Stephanie Batchelor
Potatoes, potatoes.
Ryan Bridge
Can’t be that fancy, can we? Anyway, what are we hearing? Because they’re making an interesting move in response to different sales.
Stephanie Batchelor
Yes, so McDonald’s has been raising prices for years, and now consumers are starting to really push back. They’re saying it’s too much for these products. And so, in the quarter, we actually saw, for the first time in over three years, McDonald’s global sales decreased, and the CEO said they are seeing it more in that lower-income household. But as a result, they’re now starting to introduce more value meals, more value options on the menu to try and re-establish that value perception and win some of those customers back.
Ryan Bridge
It’s interesting, isn’t it? Because when you get a product like McDonald’s, which don’t get me wrong, I love, but when it’s nearly $20 for a combo and you start comparing that to something that might be a little more boutique, or higher in nutritional value or something like that, a consumer starts to make decisions, don’t they?
Stephanie Batchelor
Exactly. And we’ve seen a lot of consumers just start to eat more at home as well, going to the supermarket, even buying to-go meals or something like that, rather than going to the McDonald’s of the world.
Ryan Bridge
True. Now, Steph, I’ve got an example for us this morning. Ironically, these two products are almost considered staples. One arguably wouldn’t be good for your teeth, the other generally considered to be good for your teeth. Tell us about how staples like these brands are fairing at the moment.
Stephanie Batchelor
I’m glad you got the branding right. So, consumer staples companies have been performing much better than consumer discretionary. And because investors are worried about this economic slowdown and consumers pulling back spend, that’s typically the environment where discretionary items like apparel and footwear really suffer, whereas people are still going to spend on things like toothpaste. So, Colgate-Palmolive has actually been one of the best performers year-to-date, and of course, on really strong brands like Coca-Cola. I mean, I know Coke shouldn’t be a staple, but it does become quite ingrained in people’s habits. And some other names that have also done well in athletic footwear, for example, there are names like On Footwear or Deckers, which own Hoka, as well as the Ugg brand, Asics, Adidas, they’ve all been doing very well at the expense of the likes of Nike, Puma, Under Armour. So, it is quite brand dependent in that space. And then restaurants, so McDonald’s not doing so well, but you still have names like Wingstop and Shake Shack, which are continuing to perform because they have quite an attractive store rollout strategy ahead of them. And then Walmart, another one doing great at the expense of dollar stores.
Ryan Bridge
So, it’s an interesting dynamic. We’re talking about price-conscious consumers, and you would think in a price-conscious environment like that, that dollar stores would be doing really well. You mentioned that your $2 shop equivalents would be doing really well, but they’re not. What’s going on there?
Stephanie Batchelor
This is an interesting one. Dollar General reported about 10 days ago, and shares were down 30% on the day, which is its biggest ever one-day move.
Ryan Bridge
Wow.
Stephanie Batchelor
And what they said is that their consumers are finding it hard to make their budgets last to the end of the month, and 60% of their customer base is finding it difficult to afford the basic necessities. And then Dollar Tree, another dollar store, also reported, and shares were down 22%. So, another huge move, and it was sort of a similar dynamic going on to Dollar General. And it is interesting because, as you say, you would expect these companies to do well in this sort of environment where people trade down, they’re looking for value, but the stocks are now down 40% to 50% year-to-date, because it is really that lower-income consumer that is struggling, and you’re also seeing the likes of Walmart and Amazon creep in and take share from them.
Ryan Bridge
Let’s talk about the other end of the market, because we’ve been talking about that more price-conscious and price-affected end. What about your Gucci’s and your Prada’s? I don’t know. Your higher-end stores and chains.
Stephanie Batchelor
Yeah, the luxury names.
Ryan Bridge
Luxury names.
Stephanie Batchelor
You would assume that a higher-income consumer, a client base, would actually be holding up okay, and these companies would be doing well. But what we saw was that during Covid, there was a lot of government stimulus, and there were not many options to spend your money on. So, we saw a lot of the lower-income, middle-income consumers start to spend on luxury products, and they entered the category. And of course, that has now fallen away in reverse, because inflation and rates are impacting them. And so, we’re seeing a real divergence in these companies. If you look at the companies within luxury that really focus on that high, high-income consumer, their names like Hermès, Brunello Cucinelli, Ferrari, even though it’s a car brand, it’s very much luxury.
Ryan Bridge
You’re better at naming these good brands than I am, by the way. I’m like Gucci.
Stephanie Batchelor
Lots of practice.
They’re holding up okay. But then if you look at the companies that really benefited from this aspirational consumer kind of moving up, that’s names like Gucci, Ferragamo, Burberry, they’re struggling a lot more. And then across the board, they’re all being impacted by a continued deterioration in the Chinese consumer. So, if we look over the quarter, I think it was 90% plus of luxury names actually missed expectations.
Ryan Bridge
Yeah, wow. Because that Chinese market is huge for the luxury goods, isn’t it? And you’ve got Chinese buyers now taking stakes in these companies. They’re sort of taking over.
Let’s talk about housing because the housing market in the US obviously has been weak, which has a flow on effect for the consumer. Have those companies like, and I’m using a New Zealand example here, like your Mitre 10s and stuff. How are they fairing?
Stephanie Batchelor
The names in the US that are like the Mitre 10s and Bunnings, that’s Home Depot and Lowe’s. And they have been weak. So, they called out that they’re seeing softness in big ticket discretionary items, things like outdoor furniture and appliances, as well as project-related spend, bathroom reno’s, kitchen reno’s, flooring projects. And they said consumers are just sitting on the sidelines. They’re waiting for those interest rates to come through before they spend. And as for when we’re going to see green shoots, it’s hard to say because there is this lock-in effect in the US, where most homeowners have fixed their mortgage rates at kind of a 4% level. And current mortgage rates are still in the sixes. So, even if we get a couple of interest rate cuts, it might still be a while before you get people reengaged in housing and housing related spend.
Ryan Bridge
Yeah, and some of them are fixed, well most of them for like 30 years, aren’t they over there?
Stephanie Batchelor
Exactly, 30 years.
Ryan Bridge
Very different to us here in New Zealand. Speaking of us here in New Zealand, are there any comparisons we can make between the consumer in the US and how they’re fairing, with obviously the price conscious, the interest rate situation is different between our two countries on both sides of the Pacific. So, can we read anything into the health of their consumer vis-a-vis ours?
Stephanie Batchelor
There are similarities and differences. It’s similar in the sense that consumers in the US and in New Zealand have been hurt by high interest rates and inflation. But it’s fair to say that New Zealand consumers are more impacted by higher interest rates, and it comes down to our mortgage structures. In the US, they’re fixed for 30 years in terms of the rate, whereas here we’re much shorter term. So, we feel that pain of higher interest rates much more quickly. And you can see it in the relative housing markets, very weak house prices here in New Zealand, whereas in the US they’ve actually held up surprisingly well. But on the positive, it means that we’ll see that benefit come through more quickly as interest rate cuts start to happen.
Ryan Bridge
Really interesting. Stephanie, thank you so much for being with me this morning, really appreciate it. That’s Senior Analyst at Milford Stephanie Batchelor talking about the health of the consumer in the United States. Remember that consumer spend drives 70% of GDP in the world’s largest economy. Thank you so much watching. Don’t forget to like and subscribe. See you next week.
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