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By Kai Cui, PhD
Our analysis suggests slowing durable goods spending by affluent Americans, implying that corporate earnings guidance may be vulnerable.
Studying credit and debit card transactions can yield key insights to investors. Such transactions provide a window into the economy, spending habits, incomes and more, and have become increasingly representative of the overall U.S. economy as cash transactions have given way to digital payments – a structural change accelerated by the pandemic.
Recently, the data has suggested important changes to spending patterns of many high-income consumers, a key driver for the economy. We define high-income as the third of American cardholders with annual incomes greater than $115,000 (after tax) – critically, representing about two-thirds of total U.S. consumer spending.
Within our most recent credit and debit card datasets, it appears that high-income spending on durable goods such as home furnishings, automobiles and electronics, has begun to decline materially.
This seems to follow a similar but better-known pattern of slower spending among lower-income card holders (with less than $65,000 in after-tax annual income).
We believe both are important trends as the Federal Reserve, corporate America, and investors consider the economy’s trajectory. However, the disproportionate scale of spending by high-income Americans could imply a disproportionate impact on the economy and – importantly – corporate earnings potential for 2H22 and beyond, which now appears at risk.
Based in part on the latest data, we believe the economy is poised for (or already experiencing) changes in high-income consumer demand that are likely to flow through company financial statements and forward estimates. Many consumers, including high-income families, were already outspending their incomes and increasing their use of credit lines, but as we are seeing, that can only last so long without other impacts.
To conclude, consumption represents about 70% of U.S. gross domestic product. Within this important category, high-income spending accounts for roughly two-thirds of consumer demand. Given current spending trends, we expect more moderate second quarter results to materialize in the weeks ahead, along with tempered expectations for the second half of 2022.
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