Data from HundredX, a company which gives a sense of consumer trends and feedback, also suggests weakening future purchase intent from that cohort in recent weeks. The weakness seems to be most pronounced among low-income and younger consumers.
When you look at some of the other income quintiles, our economists are still expecting the middle-income cohort (that’s the third quintile) to see the highest DCF growth (around 6%) on the back of the One Big Beautiful Bill tax cuts.
How is rising inflation feeding into consumer spending?
Bonnie Herzog: In broad staples, which tend to be lower-priced items, we’re seeing increased pressure to downtrade, and private label products are taking a little share.
We’ve also seen global end-market demand in a lot of household product categories slow in the last five or six quarters. I think it’s a function of the consumer being more conservative in their purchases of these everyday use items and conserving more.
For example, everyone is probably washing their clothes, but maybe they’re putting more clothes in each load to make their detergent go further. Those behaviors could afford them the ability to spend in other areas—whether it’s experiences, travel etc.
How do higher costs impact US companies?
Kate McShane: We’ve been in a period of higher inflation now for around five years: The supply chain challenges coming out of the Covid-19 pandemic combined with tariffs have resulted in higher prices, and rising fuel prices are another higher input cost for products.
That’s definitely going to mean higher costs for some of our companies to manage. We’re already hearing from some of our retailers that they’re experiencing higher fuel surcharges, which will hurt margins a little bit, or maybe they will have to pass some of that price through.
But the consumer has been relatively resilient—that’s what this discretionary cash flow model has told us, and what it’s still telling us, and a lot of our companies are talking about a choiceful, resilient consumer.
At the lowest end of that income cohort, though, at $50,000 income per year and below, there’s only so many ways they can stretch their dollar. I think that companies serving a true lower-income consumer, that aren’t necessarily getting a benefit of trade-down from a middle-income consumer, have been tougher stocks to own in this environment.
Bonnie Herzog: In broader staples, many companies are facing greater cost pressures from the rising cost of oil and oil derivatives. These large multi-national companies have all acknowledged some form of hedging, but they’ve also stated that there will be some damage: They’re going to face some gross margin headwinds.
They’re all talking about some mitigation initiatives such as pulling forward productivity initiatives and cost-saving plans. But interestingly, in this inflationary environment, not many of the companies are talking about the ability to pass more costs on to the consumer, given how fragile and pressured the consumer is.
Are you concerned about a recession ahead?
Bonnie Herzog: Our economists are forecasting a 30% 12-month recession probability for the US.
In my conversations with the large staples companies, I’m hearing a lot about broad resilience and the bifurcation of consumers, so there’s certainly a slightly more cautious outlook for the consumer. But no one has mentioned the “r-word” to me so far.