Pre-market actions: The wealthy worry about spending. It’s bad news

What’s happening: The Conference Board’s consumer confidence index for August, due out later today, is expected to rise 1.8 points to 97.5, Goldman Sachs analysts say . This comes after three consecutive months of decline.

Meanwhile, final results from the University of Michigan’s Consumer Sentiment Survey this month showed a sharp increase in outlook for the year ahead.

That might sound like great news. But a closer look at the numbers shows a more concerning picture. The problem is that wealthy Americans aren’t as enthusiastic, which could signal more trouble for markets and the economy as a whole.

“High-income consumers, who generate a disproportionate share of spending, experienced steep declines in their current personal finances as well as in terms of purchasing durable goods,” the Michigan researchers wrote.

Why it matters: Spending by the top 20% made up nearly 40% of total consumer spending in the United States in 2020, according to data from the Bureau of Labor Statistics. And consumer spending is the most important driver of US economic growth.

Of course, there can be a difference between what people say they feel and what they actually do. But in this case, we’re starting to see a real impact.

Analysts from the Bank of America Institute found that total credit card spending per household (excluding groceries, gas and clothing) for consumers earning more than $125,000 contracted during three consecutive months while remaining resilient enough for the low-income consumer.
There are other signs that the rich are negotiating. walmart (WMT) Chief Financial Officer John David Rainey told CNBC earlier this month that shoppers were buying fewer high-margin discretionary items like clothing as inflation forced them to shell out more for basic necessities. He also noted, interestingly, that about three-quarters of Walmart’s second-quarter market share gains in the grocery business came from customers with annual household incomes of $100,000 or more.
High-income diners would also swap more expensive restaurants for economy standards like Applebee and IHOP.
The sales of the two chains, both owned by Restaurant brands (DIN), rose about 6% to 8% among households earning more than $75,000 a year in the second quarter, according to Dine CEO John Peyton. The bump “suggests to us that customers who often dine at more expensive restaurants find Applebee’s and IHOP because of their well-known value position,” Peyton said in a call with analysts earlier in the month.

This may sound positive for companies that are well placed to benefit from such changes in habits. The problem is that low-income consumer sentiment is generally lower than high-income consumer sentiment, which means a bigger downturn could be on the way.

“In an economy that is 60% service-based, you can see how easily this spending outlook in a narrow group of earners has a bigger effect on a broader group of Americans,” said Marvin Loh, strategist. senior global macroeconomics at State Street, said. “That’s the definition of runoff.”

Investor perspective: This doesn’t bode well for stocks of companies that sell things people want but don’t necessarily need. names like Amazon (AMZN), Home deposit (HD) and LVMH (LVMHF) helped propel the sector from its mid-June lows, rising nearly 30% through mid-August before falling back. The sector fell precipitously after Federal Reserve Chairman Jerome Powell indicated there would be “pain” ahead as the US central bank continued its tightening policy.

“The gains we’ve seen over the past six weeks didn’t make much sense to me,” Loh said.

Thank you a (pumpkin) latte

It’s 88 degrees in New York and California is in the grip of a devastating drought. But as long as Starbucks (SBUX) is concerned, it’s time to break out the thick sweaters. The Pumpkin Spice Latte is back in store.
Although PSL may be weatherproof, it is not immune to inflation. The fall favorite, reports my CNN Business colleague Jordan Valinsky, is getting more expensive, with a full-sized hot drink costing customers between $5.45 and $5.95 depending on location — a bump around 4% compared to 2021.
Starbucks is not alone. Earlier this year, Burger King removed the Whopper from its value menu and reduced its nuggets from 10 pieces to eight pieces. Chipotle (GCM) has raised prices at least three times since August 2020. Dunkin’, Taco Bell, The Cheesecake Factory and McDonald’s (MCD) also increased prices to account for the increase in inflation. Over the past year, the cost of food has increased by approximately 11%. This is the highest reading in over 40 years.

So far, consumers have continued to absorb high prices for discretionary goods, but as inflation and interest rates continue to rise, some are wondering if this fall and holiday season will mark a turning point. .

“This year, we are looking at negative discretionary cash flow for the first time since the 2008-09 financial crisis,” Jason English, consumer goods analyst at Goldman Sachs, said last week. Goldman estimates there will be a 1.2% decline in discretionary cash available this year for the holiday season.

Starbucks is definitely watching. The PSL has always been a huge seasonal channel sales engine. In 2021, Starbucks saw a noticeable increase in sales the week it started selling PSLs. The 10% week-over-week increase was the biggest increase in weekly sales since the spring.

And while the PSL season may be a little lackluster this year, Goldman expects spending to pick up in the new year. Consumer cash flow will increase by 6% in the second half of 2023, they predict. That’s an overall gain of nearly $600 billion, or about 110 billion slats.

This Fed official is happy that stocks are falling

Markets took a beating last week – and that’s not necessarily a bad thing, according to a Fed official.

The fall following Fed Chairman Jerome Powell’s Jackson Hole speech on Friday shows investors are finally taking the Fed’s commitment to lower inflation rates seriously, the Fed Chairman said on Monday. of Minneapolis, Neel Kashkari, in an interview with Bloomberg’s Odd Lots podcast.

“I was actually happy to see how President Powell’s Jackson Hole speech was received,” Kashkari said.

“I certainly wasn’t thrilled to see the stock market rally after our last Federal Open Market Committee meeting,” he added. “Because I know how determined we are all to get inflation down. And I kind of think the markets have misunderstood that.”

Markets have fallen significantly since Powell’s speech where he said tackling inflation would cause “households and businesses to suffer.”

The S&P 500 closed down 3.4% on Friday, its worst day since mid-June. It fell again on Monday.


▸ The Conference board releases US consumer confidence for August at 10 a.m. EST

▸ JOLTS job postings for July are posted at 10:00 a.m. EST

▸ Earnings of Baidu (BIDU), best buy (BBY)RESUME, Hewlett Packard Enterprise (HPE), Soft (CHWY)PVH and CrowdStrike

Tuesday: ADP private sector employment in the United States; China official PMI; India’s GDP; revenue from the Evergrande, Meitu, Brown-Forman and Designer brands