The TD Cowen Insight
Our proprietary surveys of consumers and companies across transportation verticals, along with data sets related to spending trends, suggest a broadly weakening consumer. Policies enacted during the pandemic related to student loan forgiveness, enhanced EBT benefits and Medicaid are set to expire, creating headwinds to lower income consumer spending.
We highlight our proprietary surveys and data sets combined with commentary from our Washington Research Group on key policy matters along with 10 TD Cowen analysts on the state of key consumer end markets and outlook by sector.
Macro Indicators Point to Slowing Growth
Key macro indicators and our proprietary work point to slowing growth, persistent inflation, credit contraction, higher for longer interest rates, and rising risk. Based on investor positioning and sector valuation, we are more bearish than consensus on retailers, brands, and categories exposed to low-income consumers.
Negative and Positive Impacts on the Consumer Sector
Rising use of credit/leverage across younger demographics and fading stimulus create the most risk for lower-income consumers. These negatives are balanced by areas within the consumer sector that are gaining wallet share (travel, hotels, luxury goods, and some product cycles in athletic apparel/footwear are resonating). A bifurcated macro-environment, along with secular trends, frame our views across 10+ sectors.
TD Cowen’s Proprietary Consumer Survey and Data Analysis
TD Cowen relies on multiple proprietary datasets to inform our outlook on the consumer. Based on our monthly survey of 2,500 U.S. consumers, as of Feb 2023, 73% of consumers have either cut spend or expect to cut spending in certain areas due to inflation. These numbers are unchanged when viewed against Jan 2023 and up vs. the 68% who said the same in Dec. This figure of 68% is only slightly below the peak of 75% in Sep ’22 despite a moderation in monthly CPI. This represents ~55% of overall respondents, of which 78% of HHs with < $50k in annual income were cutting spending.
The Impact of the End of Student Loan Forgiveness
The impact of the end of student loan forgiveness will disproportionately fall on lower-income consumers. Our range of outcomes suggests a $120B-$144B headwind in the form of student loan repayments. Cuts to SNAP benefits amount to ~$15B, which creates a nominal hit to spending, acutely at the low end. We detail EBT exposure according to our proprietary trackers. Our breakdown of borrowing by demographics highlights how younger Gen Z consumers grew their borrowings by 12% y/y in 2021 and 25% in 2022. Millennial consumers also grew their borrowings by 5% y/y in 2021 and 23% in 2022. Meanwhile, delinquencies are rising.
What to Watch
We see risk to full-year financial guidance across consumer verticals in early 2023, with consensus estimates broadly expecting an acceleration in top line and margins in 2H:23 and into 2024 relative to current run rates. Q1 earnings season could see muted commentary, and a lack of positive EPS revisions to full-year consensus estimates as visibility into 2H:23 remains low.
We remain focused on weekly/monthly data regarding consumer spending inventory levels exiting Q1 and credit availability following weakness in the regional banking system.
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