Top of the Morning: State of the US Consumer & Back to School trends
The health of the U.S. consumer remains resilient overall, despite pressures from inflation and rising fuel costs, especially affecting lower-income households. This K-shaped economic recovery suggests a divergence in spending patterns, with upper-income consumers continuing to thrive while the lower segment feels significant strain, particularly as tax refunds have dissipated. Per the full note from UBS, aggregate spending held up during Q2, indicating stability in the broader retail environment, yet underlying vulnerabilities are present. As traders navigate these insights, understanding consumer resilience is vital, particularly ahead of the key holiday spending season.
What the desk is arguing
The desk contends that the current state of the U.S. consumer is mixed, characterized by resilient overall spending but significant challenges for the lower-income segment. Sunny Mehra's insights from UBS highlight a K-shaped recovery affecting consumer behavior, particularly as fuel costs rise, impacting disposable income at the lower end.
Evidence supporting this view comes from recent Q2 retail earnings reports, which indicated that spending, on average, has remained stable. For instance, while the overall economy continues to progress, fuel prices nearing $100 per barrel and gasoline surpassing $4 per gallon put pressure on lower-income households, suggesting that shifts in consumer sentiment could affect market behavior.
The alternative read could suggest that the economy is fully robust and poised for growth across all income levels, but the data hints at an underlying strain that could impact consumer spending dynamics in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The overall health of U.S. consumers is deemed resilient, yet there is notable strain at the lower-income level.
- 02Rising fuel costs and the end of tax refund boosts are pressuring lower-income households.
- 03Retail spending remained stable in Q2, but a K-shaped recovery signifies differing experiences across income levels.
- 04Observations point towards critical spending trends leading into the back-to-school season and beyond.
Market implications
Traders should monitor fluctuations in consumer sentiment as rising fuel costs may influence spending behavior in key retail sectors. A close eye on the upcoming back-to-school shopping season will reveal more about consumer resilience and discretionary spending patterns, particularly as we approach holiday spending.
Risks to this view
A significant downturn in employment figures or further financial strain from inflation could reverse the current consumer confidence and spending patterns. Additionally, a drastic spike in fuel prices beyond current levels could exacerbate pressures on lower-income households, which would critical shift market dynamics.
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
Today's conversation will focus on the state of the U.S. consumer, including a look at spending trends, sentiment, positioning preferences, among some other timely topics. Joining me here today for the conversation, glad to welcome back to Top of the Morning Sonny Mera, Consumer Equity Strategist for the Americas from the UBS Chief Investment Office within UBS FSI. With that, Sonny, thank you for dropping by today to spend some time with our listeners and their clients.
Welcome back. Thanks, Dan. Thanks for having me.
Sonny, to begin, how would you characterize at the moment the health of the U.S. consumer? What might be some economic pain points or areas of strain relative to where consumers are spending and what they're spending on at the moment? I would say the health of the consumer overall is good, Dan.
I mean, resilient is the word that loves to be tossed around by corporates, but that's at an aggregate level, like taking account all consumers and totaling up all their spending. With Q2 retail earnings, which just ended like last week, we saw overall spending hold up. You see this in the macro data as well.
Look, the economy continues to roll along fine. The labor market continues to be fine. But what we do see under the hood is clearly a K-shaped economy that is in full effect.
The lower end has seen incremental pressure since the beginning of the year, mainly due to higher fuel prices. I mean, look, today, like oil is near $100 now. Gasoline, the national level is above $4 now.
Earlier in the spring, tax refunds helped offset some of this pressure, but now those refunds are gone. And so this fuel cost is starting to really bite at the lower end, and we're starting to see that at the lower end. And on the flip side, look, the upper income companies do very well.
For all the worrying headlines this year, the stock market is still up double digits, and this is on top of double digits each of the last three years, right? So huge amount of total gains there. Home prices are up 50% since pre-COVID levels.
So this incredible wealth effect is really helping the top income cohort. About the top 20% of households is really benefiting from that, especially the very top, the very top 1%, really benefiting them. So simply I'd say the upper income is doing better, the lower a little worse, if you took it, say, versus a year ago.
But on an aggregate level, it's stable or the same. So if you combine all that, and what that really means is the share of spending, let's say a share of the total pie that's being done by the upper income cohort is slightly higher than it was years ago, as it keeps being stronger than the lower income. That's the way I'd look at it.
So Sonny, as we're speaking here today in early September, school is back in session. Any sense for how this year's back-to-school shopping season shaped up? Yeah, so look, we've heard some encouraging things for back-to-school, I'd say, the few data points that we've gotten.
I'd be cautious not to put a ton of weight there. There wasn't too many data points so far in the calendar. It's also a little weird, you know, we saw Labor Day being very late, basically the latest it could be this year.
And that likely extended the back-to-school season. But that said, you know, I think most retailers admitted that August was a better month than July overall. The other thing, you know, I want to touch on is what is the consumer spending on?
And this is just overall, not just for the back-to-school season, but just overall this year and kind of what the trends that we're seeing. I would say health and wellness, anything to do with that is doing very well, along with beauty. Services overall, like travel, entertainment, very strong.
You know, people are still prioritizing experiences, things like going to a World Cup game, going on vacation. And the areas of weakness is, you know, housing remains weak. Anything in the athletic or athleisure area, especially athletic footwear, that remains very weak.
And apparel, you know, is mixed, I'd say, basically a market share battle among the brands. You know, some preppy looks are in, denim continues to do well, and some other areas are softer, but just more of a market share battle in apparel. Yeah, so I'd say that for trends.
You cover both the U.S. consumer discretionary and consumer staples sector for the UBS Chief Investment Office. Within both sectors, what areas do you prefer the most at the moment? We're attractive on the consumer discretionary sector, and we're neutral on consumer staples.
And so, you know, a consumer discretionary should benefit from, you know, essentially this, what I talked about, kind of an overall level of consumer spending holding up, and you know, along with some tariff relief versus last year. And then within that discretionary sector, we prefer services companies, and really a couple of services companies that cater to higher end U.S. consumers. That's where the strength is.
If you think of services versus goods, upper versus lower, and you think of that kind of quadrant, you know, you prefer services, and you prefer upper over lower. Beyond that, we like the dominant retailers, basically the number one in their categories that can invest and take market share, and then really investing in AI, and you can start to see those benefits down the pike. And then within staples, we prefer beverages over food.
You know, I think food is pretty clear that there's headwinds on the food side going forward, whether it's a move to, you know, a shift to kind of healthier eating, whether it's GLP-1 drugs having an impact on calories consumed, whether it's a shift, you know, in the grocery aisle to more fresh food versus kind of the packaged food. So we prefer beverages, and we prefer companies with good EM exposure over domestic exposure. You know, companies that we like are showing good top line organic sales growth right now versus ones that may be cheaper, but they're struggling to grow sales.
We prefer the kind of the higher quality, growing the top line, a little more EM exposed because those markets are doing better than the U.S. Sonny, as mentioned, we are speaking here today late summer. However, the holidays will be here before we know it.
So looking down the pike a bit, how are you anticipating that the 2026 holiday shopping season will fare? And what are retailers doing at the moment to prepare for it? Usually back to school is a good indication for the holiday.
And as I said, you know, back to school so far seems to be pretty, pretty good or what the data points have gotten seems to be pretty good. So, you know, my base case is I would expect a fairly good holiday season. Again, this is assuming what we know now and, you know, oil around here, not spiking another $30 or something.
But yeah, I would expect a pretty decent kind of Halloween fall season and a pretty decent holiday season as well. Halloween is also on a Saturday this year. You know, one thing to watch out for is that that kind of, you know, the fuel prices essentially, it's not just to the consumer directly in terms of gasoline.
It's also the retailers are starting to speak to it because, you know, the trucking, you know, how they ship, you know, from warehouses to stores, et cetera, even online businesses from stores to the end consumer, you know, those diesel prices, energy prices are starting to ripple through in terms of freight, trucking costs, even packaging. And so we've heard some commentary from retailers that, you know, their costs are going up in the back half and it's something to watch out for if they look to pass those on to consumers, which many of them probably will do that. So you could have a situation where prices start to tick back up as we go into the holiday season because of these rising energy prices.
So just something to watch out for. But at the end of the day, the way I'd summarize is look like the US consumer finds a way to spend as long as you give them what they want or something enticing. So if there's product out there that they want, they will find a way to buy it essentially.
And they do have the ability in general to spend. And then the other trend that we've seen is spending around kind of events or holidays has generally been increasing as a portion of the pie over time. So, you know, you might have these kind of bigger peaks and valleys essentially.
So, you know, if there's weeks or months where there's not an event or not a holiday, you might have more slower spending, but then for something like Christmas or holiday season, the consumer shows up and spends. So, you know, at the end of the day, Santa will come. Christmas will be there.
And I think overall holiday spending will be fine. Sonny, great catching up with you today on top of the morning. Thank you for dropping by to share your thoughts with our listeners and clients on the state of the US consumer, what you've been picking up on with respect to spending trends, sentiment, and it sounds like we can have a follow-up conversation post the holidays and see how the shopping season shaped up, though.
Thank you again, Sonny, for dropping by top of the morning today. Appreciate your time. Thanks, Dan.
Thanks for having me. Absolutely. Again, today we have been joined by Sonny Mara, consumer strategist for the Americas from the UBS Chief Investment Office within UBS FSI.
To you, our listeners and our clients, you can locate Sonny Mara's latest research, publications, blogs on the US consumer discretionary and US consumer staples sectors available for you now up on UBS.com slash CIO. From UBS Studios, I'm Dan Cassidy. Thank you for joining us.
For more information, please visit our website at UBS.com slash workingwithus.com. A full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com slash CIO dash disclaimer.
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