US economy at risk of wobble as lower-income consumers get squeezed

The U.S. consumer, a critical economic driver, faces significant headwinds heading into the holiday season and early 2024, raising concerns about its durability and potential impact on Q4/Q1 economic growth. Key stressors include the potential loss of federal food benefits and ACA subsidies, a softening job market with layoff announcements, rising prices, and declining consumer confidence, particularly affecting less affluent households. While higher-income consumers continue to spend, contributing to a 'K-shaped' economy, these combined pressures, alongside slowing income growth and anticipated reduced holiday spending, suggest a challenging outlook for aggregate consumer activity, creating uncertainty for policymakers and investors monitoring economic resilience.

Analysis

The U.S. consumer, a critical economic driver, faces significant headwinds heading into the holiday season and early 2024, threatening its historical durability. Key stressors include potential losses of federal food benefits (SNAP) and Affordable Care Act (ACA) subsidies, alongside a softening job market marked by recent layoff announcements from companies like Amazon and UPS. This confluence of factors, coupled with rising prices and declining consumer confidence, is expected to particularly stress less affluent households.

Economists, including Joseph Brusuelas of RSM US, project these "adverse policy shocks" could reduce Q4 growth by a full percentage point to as low as 1%, and lead to an increase in the unemployment rate. Fed Chair Jerome Powell acknowledged a "bifurcated" or "K-shaped" economy, where higher-income households continue robust spending while lower-income segments exhibit stress, such as rising auto loan defaults. JPMorganChase Institute data further indicates inflation-adjusted income growth for the 25-54 demographic has slowed to 2%, mirroring post-2007 crisis levels.

The outlook for holiday spending is pessimistic, with Yardeni Research noting surveys indicate consumers plan to spend less and tighter immigration enforcement potentially reducing the number of shoppers. While Treasury Secretary Scott Bessent anticipates substantial tax refunds in Q1 next year could provide some offset, the immediate impact of reduced SNAP benefits (a $100 billion annual impact per Pantheon Macroeconomics) and higher ACA premiums poses a direct challenge to household budgets. The ongoing government shutdown also impedes timely economic data, complicating policymaker assessments.

Key Decisions for Investors

• Investors should closely monitor consumer discretionary and retail sectors, particularly those catering to lower and middle-income demographics, for potential revenue and earnings pressure given the anticipated consumer stress.
• Evaluate portfolio companies' exposure to potential policy shocks like ACA subsidy cuts and SNAP benefit reductions, as well as their labor market sensitivity, especially for firms like Amazon and UPS which have announced layoffs.
• Pay close attention to upcoming economic data releases, particularly consumer spending and employment figures, once government data flow normalizes, and track any legislative developments regarding federal benefits or tax policies that could alter consumer purchasing power in early 2024.