Market Insights | Dissecting the US Consumer Cohorts

Market Insights | Dissecting the US Consumer Cohorts

By Cornelius Zeeman and Seipati Rakgoale,
Fairtree Portfolio Manager and Equity Analyst

The United States has managed to avoid a recession thus far, but a slowdown in economic activity is still expected. Current macroeconomic data provides mixed signals: real wages are growing, unemployment remains low, but inflation remains sticky and credit scores are deteriorating. 

Wage growth.

Real wage growth has been particularly strong for lower-income cohorts, which has fueled discretionary spending over the past two years.

Graph 1: Real wages indexed

Source: Morgan Stanley

Credit delinquencies.

Consumer credit data shows a consumer under pressure, especially when looking at credit cards and auto loans. COVID-relief cheques assisted struggling consumers in paying down debt. It also allowed subprime borrowers to qualify for credit they otherwise might not have. Mortgages are mostly fixed rates, so the higher interest rates have not taken their toll on those consumers.

Graph 2: Transitions to serious delinquency

Source: Morgan Stanley

Retailers’ exposure.

In a tight economic environment, lower-income consumers are most impacted, making it crucial to assess which retailers are most exposed to these income brackets. Discount retailers, such as Dollar General and Dollar Tree, as well as aftermarket automotive parts retailers, like AutoZone and O’Reilly, look the most vulnerable.

Graph 3: Retail consumer exposure by household income bracket

Source: Morgan Stanley

Policymakers and businesses alike must be prepared to navigate the evolving economic environment, especially as a slowdown may impact consumer spending and retailer performance. Adapting to these changes could be key to maintaining economic resilience and supporting consumers through uncertain times.


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