This week, businesses from all over the country, including used car dealers, restaurant owners, airlines, and big retailers, have expressed concerns about the health of the US consumer. These concerns are increasing doubts in the stock market about the likelihood of a gentle landing.
A major factor supporting the bullish belief that the US economy may avoid a recession, despite the Federal Reserve’s aggressive interest-rate hikes, is the confidence of US consumers, which looked unshakeable until very recently. However, there are now some indications that consumers might be feeling the squeeze.
CarMax Inc., a used automobile dealer, stated on Thursday that some of its clients “are going down to a different level of car” in order to afford monthly payments. Earlier in the week, retailer Costco Wholesale Corp. warned that its sales on expensive discretionary items had not generated as much demand as it had hoped. JetBlue Airways Corp., an airline, also issued a profit warning, stating that leisure travel bookings declined in September. Furthermore, Darden Restaurants Inc.
claimed that some of its customers are switching to less expensive booze compared to previous year.
According to Keith Lerner, co-chief investment officer at Truist Advisory Services, “the triple whammy of higher interest rates, higher energy prices, and the restart of student loan repayments are all likely to weigh on the consumer, especially the lower-end income cohort.” As a result, the economy may become “harder to land.”
Over the last two weeks, the S&P 500 Consumer Discretionary Sector Index has decreased by 8.4%, with CarMax, Carnival Corp., and Amazon.com Inc. leading the losses. In contrast, the S&P 500 Index fell by 4.8%. Personal consumption, the key engine of the US economy, increased in August at the weakest monthly rate since late 2020, and in September, US consumer sentiment fell to a four-month low.
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The warning from Morgan Stanley’s Michael Wilson on Monday, who noted that risks are rising for consumer stocks due to the resumed student loan payments, rising delinquencies in certain household cohorts, higher petrol prices and weakening data in the housing sector, coincides with the signs of declining confidence.
Some proponents of the gentle landing concept are unfazed by the early signs of weakness. Chief Executive Officer of Bank of America Corp. Brian Moynihan stated that his company’s strategists continue to predict a soft landing for the US economy, driven by ongoing strength in consumer spending.
Others emphasise the labour market’s resiliency and wages’ robustness. There were some encouraging signs among corporations as well, with the shoe company Nike Inc. reporting “better than feared” profits and the cruise line Carnival noting an improvement in American vacation demand.
Alejandra Grindal, chief economist at Ned Davis Research, warned clients in a note that there is a chance that the US consumer is not as robust as we believe. The good news is that real earnings are increasing and, in some cases, returning to growth rates seen before the pandemic. This ought to encourage consumer spending, she claimed.