Goldman Sachs is sounding the alarm about the health of American consumers, who are suffering from inflation caused by the conflict with Iran.
And weaknesses can be exposed, Goldman warned in a new note on Tuesday.
What Goldman warned about the buyer: Goldman strategist Ronnie Walker said, “What initially appeared to be a strong year in consumer spending has quickly turned into a challenge. … We expect weaker real consumption growth in the coming months.”
Why now: It all depends on the impact of higher gas prices.
“Gas prices have risen nearly 40 percent since the war began, which means about $140 billion a year in domestic income at current levels,” Walker wrote. “Below the initial forecast of our commodity strategists where Brent [crude oil] returns to $80/bbl by the end of the year, we expect this windfall to decrease to $60 billion annually by the end of the year but total $70 billion by 2026 overall. Higher fuel prices weigh equally on consumption by lower-income households – who spend nearly four times as much on fuel as a share of after-tax income compared to higher-income households – and spending on discretionary categories, such as restaurants.”
What consumer data means: The latest University of Michigan Consumer Sentiment Index showed that US consumer confidence this month fell to a low of 47.6.
This represents a staggering 11% drop from March and the lowest reading in the survey’s 74-year history. It even fell below levels seen during the 2008 financial crisis and the inflationary shocks of the 1980s. The decline was across age groups, income levels, and political parties.
Read more: What is consumer confidence, and why is it important?
Dour consumer conditions reflected the rise in gas prices related to the Iran war. Expected inflation this year rose to 4.8%, the highest rate for one month of the year.
Next, look at retail sales data for March on Tuesday morning – it should provide a good snapshot of how consumers responded last month to rising energy prices.
What consumer stocks mean: Investors have begun scrambling to get soft results from fast-food and dollar store players with overexposure to low-income consumers. Shares of McDonald’s (MCD), for example, did not participate in the broader market rally and are down 1% in the past month. Dollar General (DG) and Dollar Tree (DLTR) didn’t do much either, rising 1% each over the past month.
What Yahoo Finance is hearing about the consumer right now: Executives of consumer companies have painted a picture of a tough consumer. Naturally, most CEOs of government procurement companies won’t say their customers are very careful. But the underlying numbers from many companies suggest that the consumer is holding on, believe it or not.
PepsiCo ( PEP ) CEO Ramon Laguarta told Yahoo Finance that consumers responded well to Frito-Lay’s lower-priced snacks, and the snacks business improved in value for the first quarter. Ulta Beauty ( ULTA ) CEO Kecia Steelman told Yahoo Finance that shoppers aren’t trading up cheaper makeup or traveling less because of rising gas prices.
Steelman explained on Yahoo Finance’s Opening Bid Unfiltered podcast, “95% of our sales come through our loyalty platform. If we check [consumers]who tell us that if they have a schedule, they are really sure that they will not compromise on that schedule, which they consider as taking care of themselves. They view both beauty and life as self-care. So they prioritize that. Now, I’m not saying that won’t change if gas prices continue to rise and if the consumer is squeezed. We haven’t seen … anything change in our business [yet]. But, we still have a full year ahead of us.”
Bottom line: It’s reasonable to expect some softening of first-quarter earnings numbers for discretionary retailers like Macy’s ( M ) when they report in May. Outlooks may also be outdated.
Remember, just because the stock market is back to hitting record highs doesn’t mean that translates to how much money the average US family has left over at the end of each month after paying more to fill up the car or truck to get to work.
Brian Sozzi is the Editor-in-Chief of Yahoo Finance and a member of the Yahoo Finance editorial team. Follow Sozzi on X @BrianSozzi, Instagramagain LinkedIn. Tips for news? Email brian.sozzi@yahoofinance.com.
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