Middle class consumers’ (income $161,000-$53,000) sentiment dropped 6% after being up earlier in the summer as a result of more people believing their income would drop in the near future. They have now joined lower-income earners in both reducing their purchases and having a gloomier economic outlook.
What evidence do we have that this is happening?
- Walmart is reporting mid to low-income shoppers are reducing spending with less discretionary items in their carts.
- Advance Auto Parts, Dollar General, Kohl’s are reporting the same challenges with their lower income earners.
- IHOP and Denny’s customers are choosing cheaper menu items and buying fewer drinks. Denny’s diners between $50-$75k income are coming in more for its $5 breakfast deal.
- Fed Reserve Bank of Atlanta President Raphael Bostic ” Folks that are low and moderate income, don’t have extra money anymore”
Meanwhile, high income earners continue to thrive. The gap in confidence between the lowest and highest earners is the widest it has been in seven years of tracking the data.
The main culprit of reduced spending? Inflation
Over 70% of people surveyed this summer say they plan to spend less due to anticipated large price increases. At the same time, high earners are expected to continue their recent spending patterns.
What do changes in spending patterns mean?
Often, anticipated inflation can be just as damaging as the real thing. We are already seeing a slowdown in economic spending. This will put additional pressure on businesses to cut their own expenses to maintain profit margins. Because tariffs raise input costs on anything not made domestically, US companies will not only face higher prices to produce their goods but it also makes it harder for businesses to justify bringing back domestic production as those costs also rise.
So what happens next?
- Each successive quarter that tariffs remain in place will pressure businesses to cut costs and more than likely reducing staffing. Profit margins will continue to remain under pressure.
- Last month, a U.S. Appeals Court ruled the Trump administration lacked the authority to impose reciprocal tariffs which the administration has appealed. If the Supreme Court refuses to hear the case or rules against the administration, the tariffs would expire after October 14, 2025, unless a stay is granted. Should tariffs expire, look for a strong movement in the markets.
- The markets remain optimistic that the negative sentiment now growing in the economy will soon justify an interest rate cut which will also support stock price levels.
- Portfolios remain skewed towards US and International equities and will remain so until we have greater clarity on the ultimate level of tariffs or the economy worsens.