The Big Question in the U.S. Economy: How Are Consumers Holding Up?

A glance at the numbers seems encouraging: Consumers are still spending while riding a wave of full employment and rising wages.

That’s important, given the outsized influence of consumer spending on the U.S. economy. The U.S. Commerce Department reported that consumer spending grew by an inflation-adjusted 3.7% in the third quarter, helping drive growth in the nation’s gross domestic product (GDP).¹

However, we think a closer look at the data and the experiences of various companies tell a more complicated story: Higher-income consumers have mostly maintained their spending habits despite inflation. Many middle-income consumers are opting for cheaper brands and retailers. Meanwhile, lower-income consumers are making tough spending decisions, depleting their savings and increasingly relying on credit.

Portfolio managers monitor consumer data closely because spending habits, timely bill payments and savings levels can indicate whether the economy will keep growing or face a downturn.

Analyzing the Consumer Spending Landscape

By examining the performance and trends of businesses that cater to low-, middle- and high-income consumers, we can gain valuable insights into broad economic conditions and consumer behavior that help us make informed investment decisions.

High-Income Consumer Spending Trends

In our view, the situation with high-income consumers is simple: Their incomes have grown thanks to salary increases, the impact of higher interest rates on their savings and the growth in their stock portfolios in a strong market. The rising value of their homes has also contributed to their wealth.

The high-end department store Nordstrom demonstrates the high-income consumer spending dynamic. In its last August 2024 earnings report, Nordstrom beat expectations. CFO Cathy Smith reported strong sales across all consumer income groups at the company’s discount brand, Nordstrom Rack, and spending remained strong at its luxury flagship brand.²

Low- and Middle-Income Consumer Spending Trends

It’s a challenging spending environment for low-income consumers. Inflation has restricted their discretionary spending, while the loss of extended Supplemental Nutrition Assistance Program (SNAP) benefits from the pandemic has also affected their ability to make purchases.

McDonald’s recently tried to attract lower-income patrons with a $5 meal promotion emphasizing value and affordability. While the offering has helped the fast-food chain regain market share, the company reported that many lower-income consumers are choosing to cook at home more often.

“I think consumers continue to be discerning with where, with whom they’re spending money,” McDonald’s CFO Ian Borden said during an October 29 earnings call. “I think while there’s broad consumer pressure, I think certainly lower-income consumers and families are consumers that are under more acute kinds of pressures.” ³

In our view, middle-income consumers are the toughest group to read. Generally, we think they are hanging in there and still spending at a moderate pace. However, we see signs of weakness among those increasingly willing to trade down to discount retailers and private-label brands.

For example, discount retailer TJ Maxx is attracting consumers seeking value who might otherwise shop at Macy’s, which has reported weaker trends.

Consumers are also trading down in the shipping and parcel industry. In September, FedEx said many customers are switching from priority shipping to cheaper, deferred shipping options.⁴

Consumer Spending Differences: Sprouts vs. Dollar General

Retailers Sprouts and Dollar General help illustrate the divided landscape. Sprouts Farmers Market, a grocery chain geared more toward higher-income shoppers, has seen its stock grow by 81% year to date through October. See the green line in Figure 1.

Meanwhile, discount retailer Dollar General is struggling alongside other dollar stores. Its shares are down 42%, making it one of the year’s worst-performing stocks in the S&P 500^® Index, as shown by the blue line in Figure 1.

Flowers Foods, a bread company, offers another example of the divided consumer experience. Its premium and private-label brands are selling at a healthy clip, but the company’s mid-priced brands, like Nature’s Own, are struggling. We take this as a sign that middle-income consumers are likely trading down to buy lower-priced private-label brands while higher-income consumers are spending $6 or more on a loaf of Dave’s Killer Bread^®.

Identifying Differences in Spending Across Income Levels

We find it helpful to look for clues about consumer spending in businesses whose products target middle- and low-income consumers. For example, food company J.M. Smucker has seen notable growth of 24% from its Uncrustables^® line of pre-packaged sandwiches, which cater more to middle-income customers. Meanwhile, lower sales of its Hostess^® and Folgers^® brands, which offer snack and coffee products popular among lower-income customers, have negatively impacted the company’s overall performance.⁵

Similarly, Smucker’s pet treat business, featuring popular brands like Milk-Bone® and Meow Mix^®, has seen a decline as low- and middle-income consumers pull back on their discretionary spending. Smucker’s U.S. retail pet foods net sales totaled $399.7 million for the quarter ending on July 31, a 9% decrease compared to the same period last year.⁶

At the same time, Freshpet^®, an ultra-premium pet food company targeting wealthy consumers, posted net sales of $235.3 million for the quarter ending June 30, marking a 28% increase compared to the same quarter last year.⁷

Credit quality also offers a guide to the differing experiences between low- and middle-income consumers. Industry reports suggest that credit quality, across a broad swath of consumers, is holding up well and normalizing from the extreme lows during the pandemic. That’s true for people who earn at least $75,000 and own their homes. However, credit quality is deteriorating for those who make less than $75,000.

S&P Global recently reported that while the broad credit environment is meeting banking industry expectations, signs of stress for lower-income consumer credit are emerging. For instance, Ally Financial, which lends to borrowers with lower credit scores, has seen a rise in late payments, especially those overdue by more than 60 days.⁸

“Not only are they not seeing real wage growth, but they’re actually losing ground,” said Fifth Third Bancorp Chair and CEO Timothy Spence at an industry conference in September.⁹

Leveraging Business and Consumer Spending Data for Insights

It’s too soon to say whether the challenges facing lower-income consumers will extend to middle-income consumers. But for now, we think it’s safe to say that middle-income consumers are faring well but showing tepid signs of caution with their spending habits.

We will continue to monitor employment, housing, credit and consumer spending data. This information will help guide our consumer-oriented stock choices and provide insights into the overall health of the U.S. economy.