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00:00

Ronnie

Hey everybody, it's Ronnie. It's Monday, October 19th, and I'm here in our New York studio with Priya Ohri-Gupta. Priya heads our US High Grade Research team and is also our Credit Analyst on the US Consumer space. With all of the inflationary crosscurrents swirling right now, it felt like the exact right time to get a real time check on the state of the US consumer. So, Priya, welcome to the Brief. 

00:22 

Priya

Thanks Ronnie, I'm excited to be here. 

00:24

Ronnie 

It's great to have you here. And the timing is excellent. You recently teamed up with several other groups in Barclays Research, and you wrote a piece that examined the health of the US consumer, and then you titled it ‘The Consumer Who Won't Quit’, which is a great title that I really appreciate. Can you walk us through what is keeping the consumer, in aggregate, so strong? 

00:44

Priya

Yeah, Ronnie, in short, it's spending power and it's coming in much higher than we had estimated. So our economic team has identified a few factors that are contributing to this.  

First, the employment backdrop remains very constructive. We're adding about 51,000 jobs per month on average.

Second, income developments have been positive since April. So what's contributing to this? One, The Bureau of Economic Analysis has some non-wage components, those are adding about 300 billion of nominal disposable income. 

01:19

Ronnie  

Wow, that’s a lot. 

01:20

Priya 

So a lot more money for consumers to spend. And secondly payroll growth has been up 4.1% since April. And that's reasonably covering inflation that's running a little over 3%.  

And then finally consumer wealth has continued to build given strong equity market performance. That's up $7.2 trillion in the first half of ‘26. 

01:44

Ronnie 

Let's hope markets don't perform like they did last week in order to keep that in check. But let's get back to the consumer. They have a lot of choice in this economy. Can you maybe elaborate on some of the choices they're making with these different headwinds that we're all facing?  

01:29

Priya 

Yeah, Ronnie, I think choice is the right word here. Consumers are not spending on everything. That was a trend we saw post-Covid, but it's definitely shifted. And companies now have to increasingly give them a reason to spend. So what we're seeing is that spending growth on new products is actually outpacing that on essentials and maintenance goods. 

Consumers are being smart about where they're shopping, so they're comparing prices in dollar stores to mass merchants, to traditional grocery and online shopping is helping to add to that transparency.  

Consumers are buying fewer items, but they're shopping more often. They're looking for deals. They're stretching what they have in their pantries. And we're seeing some of the classic trade down behaviour as well. So, looking for lower price per item switching from branded to private label. Eating at home over eating out at a restaurant. So those are some of the behaviours that we're seeing there. 

02:53

Ronnie

So that's interesting. And kind of leads me naturally to my next question, which is higher gas prices. They're so visible. There are obviously a lot of other persistent inflation dynamics associated with that and beyond. You just kind of went through it a little bit, but can we get a little deeper into where this is showing up and what kind of divergence and bifurcation?  

03:14

Priya

Yeah, this is really being underpinned by the K shaped economy. So if we think about that, the upper to middle income tiers that are driving the top of the K to the upper right are driving a lot of the spending, supported by greater wealth creation from home prices, equity market growth, as well as higher tax refunds earlier in the year. So as we think about those incomes, households earning over $100,000 per year actually account for nearly 60% of expenditures in the US. So that's really buoying what we're seeing. 

And then if we think about lower income households, that's the bottom end of that K. They're seeing a lot more constraint around their disposable income from higher gas prices. So for example, households earning less than $70,000 a year account for only 30% of expenditures, with over two thirds of this spent on essential goods. And they spend about a high single digit percentage of their wallet on gasoline alone. So that's a lot more of their wallet share that goes to gas prices so you're seeing a disproportionate effect on those consumers from what we've been seeing in gas prices this year.  

04:27

Ronnie

All right. That's a very good assessment of this two-speed economy. Let's walk into future risk factors. Is the consumer begins to weaken more meaningfully, where are we going to see it? Where will the warning signs show up?

04:40 

Priya

Yeah. So I think there's two things that we'll start to see. First is going to be a meaningful pullback in spending. You know right now we're still seeing higher ticket spend on things like cars and travel. And we're about to go into the, you know, important holiday period so we'll start getting updates on that in coming weeks as to whether consumer behaviour is changing or not in terms of spending patterns. The other thing to look out for are higher credit card utilisation or deterioration and delinquency trends, which has also been fine so far. 

You know, if we take a step back and think about what factors could lead to some of this. You know, as we talked about, the equity market performance has been really strong. So any hiccups there on a prolonged basis. 

05:20 

Ronnie 

Not last week, but yes. 

05:21

Priya 

Yes, not last week. You know a continued elevated gas and diesel costs are contributing to higher transportation. So that's inflation risk for manufacturers and retailers. And one of the key questions is really how much of that gets passed on to consumers and how quickly that happens.

So far what we're hearing from manufacturers is that they themselves are starting to pass on prices to the retailers that they sell into. But the retailers are acting like a buffer. So the full effect of those price increases is not yet getting to the consumer. 

But we have a Barclays cost tracker and that does suggest that we could start seeing a meaningful uptick in that inflation as we move into early 2027, which could be well ahead of the CPI figures that we're looking at so definitely something to keep an eye out on the horizon. 

06:09 

Ronnie

Interesting. So why don't we end on what this means for investors? It's obviously complex and multi-variable, but let's think a little bit about which companies will do best in an environment like this and which will struggle. And please help us think about that. 

06:24

Priya 

Yeah, this is definitely a market to be selective or ‘choiceful’ as consumers are being right now. So if we think about the types of names that our equity team prefers on the specialty retail side, we're looking for companies that have clean inventory, controlled distribution, pricing power and measurable productivity upside. These types of companies would be the off-price retailers, brand owners with scarcity and pricing power, as well as select portfolio and mono brand retailers that have category leadership. So those are going to be the winners there. 

And then if we look at broad lines, hard lines and food retailing, you know, the most defensive are going to be your dollar stores. Aftermarket auto parts also have pricing power and some trade down benefits. The grocers are usually seen as a place to hide, but there's some aggressive pricing dynamics. You know, we talked about the retailers acting as a buffer for pricing, getting through consumers so that could be an effect there. 

And then home improvement could be an area of gradual improvement. And valuations have become more attractive there. But if we think about home furnishings, that's an area that could see significant margin benefits just given some of the lower tariffs that we're realising this year.

07:31 

Ronnie

Priya, thank you so much for joining us. Those are really fantastic insights and I'm sure our listeners will appreciate them. 

07:36

Priya 

Great. Thank you. 

07:38

Ronnie

In summary, US consumers continue to spend, but we argue that beneath the surface they're more selective and increasingly divided by income cohort as we head into year-end for retailers and the holiday season. It's going to be very important to track how this evolves, and it will no doubt leave a lot of opportunities for investors in this space from it all. 

Thanks a lot for listening to the Barclays Brief. Please remember to hit subscribe wherever you listen to your podcast. And we'll be back next week.