The Mighty Consumer - Bending or Breaking?

Now, a lot of what we've been talking about seems to fall under this term that has been discussed a lot, the K-shape in the U.S. economy, you know, from the very beginning in this conversation talking about divergences in income classes.

So start with you, James.

Do you think this term K-shape is appropriate? Is it overplayed? Do you include it in your own analysis?

We talk about it a lot.

We get a lot of questions about it from clients.

I think there's some evidence to support it, but there's a lot of names that are saying we're seeing actually fairly stable kind of behavior based on income groups.

And sometimes we have to go a little bit outside of our space.

So we work on the consumer group and we talk to consumers.

Our other analysts, you know, in the banking groups and the other groups, the banking, like just second quarter banking results, there was a lot of evidence against the K-shape.

They were saying, you know, a lot of large banks saying we saw similar performance and similarly good, decent performance across our income spectrum.

So even names, you know, obviously higher incomes are in a different trajectory, but there's kind of parallel trajectories between those higher income groups and lower income groups.

and that they didn't see any massive change in customer defaults or things like that relative to what they would typically be.

So sort of not supportive of the K-shaped economy.

We also talked to our leisure analyst who covers hotels.

And there was a point in time kind of early in the year where the economy side of hotels were falling off.

You know, by second quarter again, all the names saying, oh, we're seeing sort of this parallel path and everyone's trying to invent new letters now, the E shape, the C shape, right? So the E shape, I guess the concept is everyone's, you know, there's different levels of spending performance, obviously, but everyone's kind of on a parallel path.

And that narrative has become more pervasive, I think, than kind of early 1Q when everyone was saying everything is K-shaped.

As I said, we can certainly point to retailers who have managed to kind of reassort the way that their business works.

So Walmart, without this kind of growth of higher income customers, yeah, you could say, okay, if those new customers didn't come into the channel, they would have underperformed most likely.

And that would kind of point to KHA, but that didn't happen, right? They found ways to grow and to attract new customers.

So it feels like the the narrative for the K-Shape specifically has weakened a little bit.

Olu?

No, I agree.

And I'm actually working on a piece now on that particular topic.

And the way I will analyze it is you have to look at spending, you have to look at income, you have to look at the balance sheet, particularly net worth.