Why Companies Are Nervous About the Consumer

McDonald’s is among a growing number of companies to warn Wall Street that consumers are beginning to reduce their spending.Credit…Mike Blake/Reuters

The “stretched” consumer

Better than expected quarterly earnings have helped propel the S&P 500 to within a whisker of a record high on Friday. But Wall Street and Washington are closely monitoring another worrying economic indicator: the struggling consumer.

The split-screen view of the economy is becoming clearer as earnings season draws to a close. Mass-market brands, like the fast-food companies McDonald’s, KFC and Starbucks, have reported that a lot of customers are pulling back on spending as high inflation bites. But less price-sensitive sectors, such as airlines and hospitality, say customers are still booking flights, hotel rooms and tables at pricier restaurants.

The starkly different snapshots may explain why voters give President Biden poor marks for economic management, even as jobs are plentiful and growth is resilient. This is “an economy of the haves and have-nots,” Michael Reid, an economist for RBC Capital Markets, told DealBook. “The haves just have so much more spending power.”

What’s making “the haves” so flush: They tend to have little to no mortgage debt or car or student loans, and their stock-market-tied retirement accounts have accumulated healthy gains to finance vacations or nights out.

But the less-affluent are feeling the pinch. They’ve blown through their pandemic savings, and they’re racking up credit card and other loan debt. One area to watch: A surge in “buy now, pay later” programs may be masking America’s “phantom” consumer debt problem.

Company executives are increasingly warning about this cohort. On earnings calls this quarter, we’ve seen an uptick in the number of times C.E.O.s and C.F.O.s cite “low-income consumers” to explain why sales are slipping or why they give lackluster guidance on profit.

Back to top button