Are we on the brink of a stressed consumer?
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Are we on the brink of a stressed consumer?

For all the talk of a ‘soft landing’ or how buoyant and well-positioned the consumer is, there are indications of weakness in the consumer sector in the US

  • Looking at snapshots of US car auction data, and restaurant and retail spending, we have identified an age cohort who are seemingly beginning to feel the pinch, with certain purchases being delayed
  • The question is, will the weakening of spend for this age cohort continue, and are the conditions there for other age cohorts to follow?

When it comes to credit investing, you’re allowed to be early – but you can’t be wrong. At the beginning of this year there was an expectation of recession. We all know how wrong that call was. Instead, a day doesn’t go by when we don’t hear about an impending “soft landing”, or how buoyant and well-positioned the consumer is, or why despite sentiment numbers being horrific “things really aren’t actually so bad”.

However, there are indications of weakness. Apparel and discretionary goods sales are bad, and not just among the more cash-strapped US consumer. Private labels are consistently taking share from branded packaged food for the first time since the Covid-19 pandemic began. Credit usage is growing quickly1, as are delinquencies. So, what gives – are we on the brink of a stressed consumer and a subsequent strangle of discretionary spending or not?

Our proprietary research suggests that, under the surface, the 25-34-year-old cohort of consumers are cutting back on discretionary spending quickly, and the robust levels of discretionary spend broadly across cohorts is more delicate than it seems.

Unique dataset

The recent explosion in popularity of online US car auctions has created a unique two-way market dataset. The market is liquid, nationwide, and has a significant amount of data – more than 10,000 completed auctions this year – with new results daily. Using our proprietary scraping tool, we have captured and catalogued auction results over the past five years for the BMW M3. For those unfamiliar with it, the M3 is BMW’s motorsports-derived version of its legendary 3 Series – arguably the source of BMW’s classic tagline “The Ultimate Driving Machine” – and has achieved legendary status among enthusiasts. We have compared four generations of BMW M3, each representing a different cohort of collector and enthusiast. Our hope was that some divergences in the data might be predictive in giving us a clue towards coming stress.

It would be remiss to not caveat this work with the limited nature of the dataset. Because online car auctions are only a recent phenomenon, five years is as long as we can go back. For that reason, this should be taken as an incremental input, not an absolute driver of any broad conclusion.

So, what did we find?

We learned that the best way to identify divergences in the dataset was to plot the spread of values for different generations of M3. When we cleaned the data it became apparent that the E36 (manufactured from 1992-1999) and the E46 (2000-2006) had the most results, were the most liquid markets, and had the strongest relationship. We therefore focused our analysis on the relationship between those two generations, seeking to ultimately identify if there was a point at which the spread quickly widened or tightened beyond the historical range. As Figure 1 shows, at the beginning of 2023 the spread widened steeply beyond its five-year wides and hasn’t stopped, which indicates that the value of enthusiast-grade E46 M3s is dropping much more quickly than those of the previous generation.

Figure 1: BMW E36 and E46 price spreads (%)
Figure 1 BMW E36 and E46 price spreads (%)

Source: Columbia Threadneedle Investments’ analysis, October 2023

When you examine real retail spending (adjusted for inflation) by age cohort (Figure 2) it is clear that the different age groups directionally move together for the most part. This makes sense – discretionary spending historically tends to be similar directionally across cohorts. Put another way: even rich people cut back when things get bad. But look at March 2023: where the other age cohorts’ retail spending rebounded, the 25-34-year-olds appear to continue declining in real terms. The M3 Index spread preceded that divergence by three months.

Figure 2: real retail spending, percentage change
Figure 2 Real retail spending, percentage change

Source: Federal Reserve Bank of New York, June 2023

Also notable in this dataset is that retail spending for the oldest cohort, who are also the wealthiest, is unchanged versus the end of 2020. It was the 25-34-year-old cohort that increased spending the most, and therefore has the furthest way to fall.

The next step was to see if there were any other similar datasets that could give us some insight into the stronger parts of the consumer economy – like services and hospitality – given the “services over goods” narrative. Here, the 25-34-year-old cohort is also clearly spending less at restaurants (Figure 3), diverging with the other rebounding age cohorts.

Figure 3: real restaurant spending by age, percentage change
Figure 3 Real restaurant spending by age, percentage change

Source: Federal Reserve Bank of New York, June 2023

The M3 Index spread preceded that divergence by two months. This is the same dynamic that was apparent in the retail spend data. Interestingly, however, that trend is not reflected when the data is split only by income level (Figure 4).

Figure 4: real restaurant spending by income, percentage change
Figure 4 Real restaurant spending by income, percentage change

Source: Federal Reserve Bank of New York, June 2023

Conclusion

The spread divergence in our M3 Index preceded the divergence of 25-34-year-old discretionary spending versus other cohorts. Our theory is that the E46 M3 was the “it” car when enthusiasts who are now 30-35-years-old became legal drivers. That is the car those enthusiasts wanted when they had some expendable income, and it was the first to be delayed when it came to halting any unnecessary purchases given its expense compared to buying new clothes or eating out at a restaurant.

The questions we must ask are: 1) will the weakening of spend for this age cohort continue? And 2) if it does, will other age cohorts follow?

The recipe is there for a rapid broad deceleration of consumer spending and all it may take is a modest acceleration of the unemployment rate to trigger it.

17 October 2023
Michael Laskin
Senior Analyst, Fixed Income
James Hodge
Data Scientist
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Are we on the brink of a stressed consumer?

1 Reuters, US credit card debt tops $1 trillion, 8 August 2023

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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