Is the US consumer going soft?

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Good morning. Markets were buoyed on Monday by news of another AI tie-up: Amazon promising to deliver $38bn in AI computing capacity to OpenAI over seven years. It makes sense to us that Amazon’s shares rose 4 per cent on the deal. But shouldn’t some of Amazon’s competitors — Alphabet’s, say — have gone down? Presumably if Amazon gains market share, someone else loses it. Or are announcements like this evidence that the market for computing power is even larger than previously believed? Set us straight at unhedged@ft.com.

Consumer spending

It’s been a very good third-quarter earnings season so far. Through Friday, revenue growth at S&P 500 companies has averaged 8 per cent and earnings growth is 11 per cent, according the FactSet. 

An unpleasant exception to this happy trend has been consumer facing companies. Revenues at consumer staples companies in the S&P have grown by just 3 per cent, and earnings have shrunk by 1 per cent. Consumer discretionary earnings are down 2 per cent year over year when you Tesla and Amazon aside, Bank of America’s equity strategy team calculates. Looking at the two consumer sectors, the list of companies that have reported negative real revenue growth (that is, nominal growth or 3 per cent or less) in their most recent quarter includes Williams-Sonoma, Wynn Resorts, Nike, AutoZone, almost every public homebuilder, Procter & Gamble, Pepsi, Brown-Forman, and many others.

This is not, however, clear evidence that the American (or global) consumer is in declining health. US consumer companies, especially staples and packaged goods groups, have been struggling for years. Consumers’ tastes have changed while store brands and discount stores have taken share. The market has noticed:

Still, this season’s consumer earnings reports have had an unusually spooky feel. Adam Josephson, on his “As the Consumer Turns” Substack, summarises the bad news:

General Mills and Conagra reported continued organic sales declines; Constellation Brands slashed its fiscal 2026 sales and earnings guidance; CarMax reported a nearly 40 per cent earnings miss and significantly increased its provision for loan losses . . . the homebuilder KB Home cut its fiscal 2025 sales guidance . . . 

Among consumer packaged goods companies, Mondelez, Colgate-Palmolive, Heineken, Kraft Heinz, Rémy Cointreau and Newell Brands all cut their 2025 organic sales or volume guidance, while some others that don’t provide annual sales guidance reported sizeable volume declines (AB InBev).

Company managements have made some unpleasant noises. Here is Chipotle’s CEO, Scott Boatwright, speaking late last week:

Earlier this year, as consumer sentiment declined sharply, we saw a broad-based pullback in frequency across all income cohorts. Since then, the gap has widened, with low- to middle-income guests further reducing frequency. We believe that this guest with household income below $100,000 represents about 40 per cent of our total sales. And based on our data is dining out less often due to concerns about economy and inflation.

A particularly challenged cohort is the 25- to 35-year-old age group. We believe that this trend is not unique to Chipotle and is occurring across all restaurants as well as many discretionary categories. This group is facing several headwinds including unemployment, increased student loan repayment and slower real wage growth.

In yesterday’s newsletter about lay-off announcements, we emphasised the importance of separating anecdotes from data. The same applies when thinking about the consumer. And the macro data, though it tends to lag, has been pretty good. Retail sales were running at a year-over-year growth rate of 5 per cent in August, before the US government shutdown closed the data series. Consumer balance sheets are strong. And there are plenty of consumer companies that are reporting robust growth, not all of them luxury brands: Darden Restaurants, Tractor Supply, O’Reilly Automotive, Dollar Tree and Coca-Cola among them.

All of this makes me hesitant to declare that we are experiencing a consumer slowdown. There are, however, a couple of pieces of high-frequency data that should make us sit up and take notice, and not in a good way. First, weekly US card spending data from Bank of America. In the chart below, the bank emphasises the fact that Washington has lagged the country because of the shutdown, but you can also see a sharp recent swoon in the national data, and the lowest growth since this summer:

Next, Sam Tombs of Pantheon Macroeconomics points out that both data from STR on hotel occupancy rates and Redbook data on same-store retail sales have weakened significantly lately. Here is his chart of same-store sales:

Tombs thinks real consumer expenditure will fall to 0.5 per cent in the fourth quarter, down from a 2 per cent average over the first three quarters.

It remains an unusually difficult economy to follow, a patchwork of strengths and weaknesses, and very different for the upper and working classes. So we are not jumping to any negative conclusions. But we are watching closely, and hoping the full suite of government data comes back online soon. Investors need it.

One good read

Martha.

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