The US consumer in a tariff-laden economy with Chelsea Wiater

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

Moz Afzal:

Hi everyone. Today we have Chelsea Wiater from all the way from Portland it’s very, very early in the morning for her. Chelsea is a Lead Portfolio Manager for a number of our US growth equity strategies. So Chelsea, welcome.

Chelsea Wiater:

Thank you very much for having me. And yes, it is early here, but I am excited and I'm ready to talk about the consumer here in the United States.

Moz Afzal:

Oh, absolutely. So for those of you don't know, Chelsea's lead on our consumer discussion strategies, so let's go straight to it. So Chelsea, what are the key drivers at the moment? Obviously consumer confidence seems to be improving following the tariff hikes, but what's your latest thoughts?

Chelsea Wiater:

Yeah, I think as we talk about the US consumer and the macroeconomic leading indicators that we look at and that we analyse as investors, we talk about consumer sentiment and we talk about consumer confidence and I think a lot of times we use those two terms a little bit interchangeably, but there's some important nuance that I think is helpful as a backdrop to understanding where we're at with the two. So consumer sentiment is a focus on overall economic outlook and longer term expectations. It tends to be really good at picking up on pocketbook issues. So is this an environment where consumers have an increasing capacity to spend our tariffs hurting their wallets? Is inflation hurting their wallets? Is gas prices hurting their wallets, et cetera? By contrast, consumer confidence focuses more on the current conditions and the job market. It's better at picking up on job security indicators and whether the consumer feels confident in their willingness to continue spending.

So one is pocketbook, one is really just stability. So as it pertains to those two readings, you're very right. Sentiment has started to get much better over the last several months, but I think it's important to take sort of a longer term view of consumer sentiment when we're talking about sort of the status of the US consumer in the current day and age, this is an index that's relative to 100. So 100 saying consumers are seeing that they're going to have a better capacity to spend in the medium term horizon and pre pandemic, we were averaging somewhere between a 90 to a 97 in the 2015 to 2019 time zone. The pandemic hit in an early 2020. We fell down to about a 75 rating, so very pessimistic in that stage. We managed to bounce back through 2020 and 2021 as the pandemic worked through all the implications for the consumer, whether there was going to be significant job pullback, recession was very short-lived, et cetera.

But in 2020 when we started to see that spike of inflation at the end of 21 and then throughout 22 that reading fell down to a 55. So that is extremely pessimistic and we have been working against that now sort of basement reading since about mid 22. So 22 to 24 we managed to climb back up to about 75. So consumers are feeling right now about where we were at the peak of the pandemic era days, but that was at the end of 24 and then now in early 25 with the tariff commentary, with the concern about incremental inflation from tariffs, we've gone back to that basement level of about 55 to 60. We've seen a couple of higher ticks over the last several months, but it is very interesting to see how low the consumer psyche really is at this point in time. We just have never really recovered from the pandemic era shift in consumer thinking I guess.

Then transitioning more to the confidence side of the equation, which again is more about jobs and stability, again, it's indexed to a hundred pre pandemic. We were in the level above 100, so very much thinking that we have a good expectation for our job prospects. We have good expectations for our wages, but this fell during the pandemic to about a low of 85. It bounced back above a hundred again very quickly in 2021. And then the inflation spike and the concern about a recession that we really heard about over and over and over again in 22, 23, even in the early 24, has meant that we've really bounced back and forth between somewhere in the low 90s to a hundred to 110. But more recently in 2025, we saw again a dramatic drop in confidence and while it did bounce like consumer sentiment did more recently over the last month or two, we've seen a deterioration in reading.

So in sort of the opposite take from sentiment improving, confidence has started to take down as there was incremental concern about the job market. So we've heard this from Jerome Powell and the Fed, they're clearly saying that inflation, while it's elevated, it's at least somewhat contained. We can see that tariffs are having an impact, but it's not necessarily the massive rush on inflation that we thought it was going to be, but by contracts, the job market is now of concern. And so that has been where the Fed has shifted their focus, particularly in the Jackson Hole speech that we heard a couple of weeks ago. But I think what's also important to know is the same company, the conference board that does the consumer confidence index, they ask all of their survey respondents, what is your view on employment over the next year? Do you think it'll get better or worse?

And in the most recent reading in mid-August, nearly 60% of consumers expect unemployment to worsen in the next year, which is well ahead of the readings that we saw in 2021 when we saw peak inflation in 22 when we had peak recession concerns. And this is mirroring the level that we saw during the Great Recession. So consumers, their job prospects right now mirror what we felt in the early stages of the Great Recession. So I think that's combined with the sentiment just being basement level sentiment ratings and confidence deteriorating, it sits a pretty scary picture for the US consumer on paper at least.

Moz Afzal:

Yeah, I think there's always two or three things to observe when you're looking at this kind of data. Certainly over the past. First of all, it doesn't really give us great indicators of whether the stock market goes up or down actually, or indeed those consumer stocks outperform or underperform. So I think that's certainly one of my observations when I've looked at these indices and try to build some sort of model that tries to predict the direction. Quite frankly, it just doesn't work. But I think there are two or three different things that impact that. I think first, clearly interest rates still very high, real interest rates are still very high, mortgage rates are at very high levels and haven't really come down at all. And clearly that has an impact to the consumer in terms of behaviour, I guess the offset gasoline prices have been a lot lower as Trump has been very, very careful to make sure that Saudi and everyone else pumpers as much as possible.

Chelsea Wiater:

No, you're exactly right. In terms of the ability of these indexes or the indices to read the propensity to spend relative to the actual spend, it is sometimes pretty low. And it has been in a divergent state for the last post pandemic five years or so. It used to be much more closely correlated that the indices were much better at tracking whether the consumer was going to spend. But I think it's also a little bit maybe in vogue to be a little pessimistic about the state of the economy just because that is the noise that we're seeing in the media. The media cycle is very frantic energy at the moment. But in terms of the actual impact of inflation and tariffs on the consumer, it's no surprise that the tariff tends to have been the biggest fear over the last six months just because of the uncertainty related to the tariff level where it was going to average out which goods were going to get hit.

There was a lot of volatility in terms of the headlines. And so I think the consumer has now in early September transitioned to being more focused on inflation and whether inflation will tick back up than necessarily tariffs. So I think at this point what we've seen is that inflation has been relatively tame. There's not a tonne of concern at the moment. And what I think has helped in some ways is that the tariffs that acted a little bit as a tax on the income has shifted spending from goods to services, which has helped offset a lot of the inflationary pressures on goods because generally speaking, a consumer goes to the store and a pair of shoes that they wanted to buy a higher price point than they're comfortable spending. They might still be just as happy to go out to dinner and spend 80 to 100 dollars on a meal for four people as they were six months ago, but maybe that incremental hike on that footwear piece is something that they're not comfortable with.

Moz Afzal:

That was very interesting. So I guess the other dimension is obviously demographics. So clearly with house prices still near record highs pretty much across the whole country, stock markets at highs, if you are at the call it top quartile of the income distribution, you feel still pretty good, right? In your spending and you're not really holding back. Maybe you are still going on your foreign holidays and so forth, but if you're on the bottom quartile or bottom decile, it's pretty horrendous with you are already starting to see the delinquencies in mortgages, car loans and credit cards starting to creep higher. What are your thoughts around that? And obviously in terms of thinking about the companies that you invest in, what considerations are you giving to that?

Chelsea Wiater:

No, you're absolutely right. We have been in a persistent environment where the consumer is extremely bifurcated. The higher end consumer is very strong in terms of their positioning, their capacity, and their willingness to spend. I saw a recent figure from Moody's that the top 20% of earners in the United States account for over half of the spend. And so as that cohort of consumers is willing and able to spend, that holds up the bulk of the economy because two thirds of our economy is a consumption-based economy. So from that perspective, you have to feel pretty confident in the way the economy is going. But I think your point on the lower income consumer, I think that's why we're seeing these negative readings and confidence and sentiment is because the broad number of consumers don't have the ability to spend that upper income 20%. But your point on housing is extremely important.

The American dream is to come to the United States, buy a house, have a good job, pay it off, live the good life, and that's just not attainable for the vast majority of young consumers. And so there certainly is an environment where as rental price inflation is persistent, housing inflation is persistent, many young consumers is getting priced out of owning a home at all. And I think that's a very concerning downstream implication. But it's also good in terms of the underpinnings of the economy that house prices aren't deteriorating. That means that consumers that do own a home, which are in that upper two deciles of spend, that they will continue to underpin the directionality of spend. So that is I guess the negative silver lining if you will. But in terms of the types of companies that we look for, then what we like to invest in, it's companies that have the ability to address those higher income consumers and deliver very exciting, very innovative products and services to those consumers, but also have an attainable aspirational element for those consumers that maybe are in that middle income tier that want to feel good about themselves and maybe buy up into that category when their pocketbook allows them to.

So we like to see products and services that are differentiated in that respect. We also like to see companies that have the ability to pass pricing onto their consumer so that environments like we're in right now during a tariff impact, during a supply chain impact, like what we saw post COVID, they have the ability to retain those best in class margins. There are certainly differentiated pockets that address the lower income consumer that are interesting based on where we might be in a given cycle. But I think right now in the cycle, we are leaning away from that side of the consumer discretionary landscape at this point.

Moz Afzal:

So let's maybe drill down then think about those consumer habits given that demographic profile, how they changed over the course of the last few years, and maybe you can give us some thoughts and ideas on how which kind of sectors seem to be really improving at this point in time versus the ones that are deteriorating.

Chelsea Wiater:

Yeah, I think one of the areas that we've looked at the most in terms of what has held up is certainly that grocery store, centre of aisle, really just core essentials back skit that has held up really well over the last 12 to 18 months. And that's particularly interesting given that inflation in the first waves in 22 and 23 really hit that consumer packaged goods industry very hard. So it's good to see that grocery stores have been able to sustain that continued spend, particularly an environment the last time I was on the podcast talking about the impact of GLP-1’s and whether those drugs would have an impact on grocery store spend. So it's been good to see that those categories have felt up moving down the value chain to more of the semi discretionary items and spend where there is an ability for consumers to cut outside of the essentials basket.

We've seen that medicines and supplements have done very well. Household supplies have done very well, but importantly, personal care products have held up and that is again, sort of adjacent to that centre of grocery aisle, but consumers are still spending and willing to spend on those products that really help them feel confident about themselves. So that gets me to the next one, which is technically on more on the discretionary side, but beauty is having a very strong resurgence at the moment. And this is an interesting industry because it tends to hold up very well during recessionary or pre-recessionary environments because there's something called the lipstick phenomenon where when female consumers feel like they are going to have to cut back on their spending, instead of going out and buying a very expensive handbag or a very expensive pair of shoes, they still want to treat themselves, they just go buy a nice bottle of lipstick instead because it still is a nice treat.

And that phenomenon, it holds up very well over cycling and cycle out. And we went through an environment in beauty in particular over the last call it three years, where there was an extreme lack of newness after a tonne of incremental innovation during the immediate post COVID era. So now that we're sort of working through that lack of innovation, we're starting to see some uptick and some newness, some new brands coming to the fore. So beauty is a category that I'm excited about that is holding up generally in the discretionary side of the spectrum. I think another area that's really fascinating is travel. There is a big difference in who is willing to travel, where they are travelling to and what they're spending their travel dollars on. So things like concert tickets, events related around travel remain very strong. And this is of course over indexing into that higher income consumer who has the ability to take on these expensive trips.

But cruises are picking up steam and Airbnb type vacation rental home type outlays are very, very popular at the moment. By contrast, US domestic travel, intra-domestic travel has been somewhat stronger than anticipated. There was obviously a lot of concern that in a post-Trump environment that there would be concern that there wouldn't be as much international travel to the US and high income consumers in the US are more willing to travel domestically than they used to be. So we're still seeing lots of international travel, but domestic travel from this higher income cohort has started to pick up. So I think that's very interesting.

Moz Afzal:

Yeah, no, it's very interesting because certainly during the height of the tariff talk or trashy talk should I say, everyone was talking about Canadians not travelling, going over the border and Americans feeling quite vulnerable travelling to Canada. Do you think that's died down or is it still there because for example, the casinos were really hard hit because Canadians love to gamble in Las Vegas.

Chelsea Wiater:

No, you're right. That incremental external traveller still is definitely under pressure, not interested in coming to the us, but it is good to see that Americans are willing to spend within our borders and we are going to some other countries, some ones that maybe have been deemed on the friendly list, which is disappointing. That isn't the case with our neighbours as much as it used to be.

Moz Afzal:

Yeah, so just to iron out that point, yes, international travelling to the US has gone down, but equally Americans travelling abroad probably think twice, should I really travel abroad given the hostile environment, just go locally and I've that seen an offset?

Chelsea Wiater:

Yeah, I think that's exactly right. And then secondarily for some families the prospect of having to come back into the US is something that is not something they want to work against. So they are just saying, I'm not going to leave.

Moz Afzal:

Alright, so let's go to another important element is housing. And I know you and I have had a discussion about this in the past around obviously with mortgage rates so high, the reality is you just can't move home, right? And we've seen a big drop off in home sales nearly near COVID lows. In fact, we exceeded COVID lows in existing home sales, which is quite extraordinary if you think about it. So what are the sort of typical spending habits of people who just can't leave the house or they can't sell the house, and then maybe what is the offset to that? Obviously we started to see a breakout more recently in the last few days. In terms of US home builders for example. How do you contextualise from a consumer perspective those activities?

Chelsea Wiater:

Yeah, one of the sort of thesis that we have around the housing space in general is that as consumers are sort of trapped in their 3 to 4% mortgage and they don't have a lot of inventory to select from in the neighbourhood they want to move into and they don't want to take on that higher mortgage around six or seven percent. The thesis is that they will incrementally spend on updates to their house, both permanent and semi-permanent. So incremental spend on furnishings, incremental spend on decor, but certainly incremental spend on bigger ticket renovations. And of course the interest rate environment is an impact to that because if you have to finance a larger renovation, whether it's a kitchen or a bathroom, those items have been put on pause in the heightened rate environment that we've been in. But we're starting to see green shoots that as the rate environment is looking like it might come down that consumers are much more interested in going and purchasing those renovation items, those bigger ticket appliances, et cetera.

Now of course the offset to that is that some of these items are exactly what is being hit by tariffs, and so those items might be a little more expensive than they would have been had the renovation been done a year ago. But I think a lot of consumers have been in a holding pattern in a wait and see pattern with regard to their housing. I think if we get to an environment where we're seeing rate cuts, number one, that will be great for mortgages and great for mobility and people being able to leave the house that they've been wanting to leave for the last 18 months. But secondarily, those people that don't necessarily want to leave are going to go ahead and put on the deck on the back of their house. They're going to go ahead and add a bathroom to the basement because they like their house, they like their mortgage rate and there's no need for them to move.

Moz Afzal:

Yeah, an extra lick of paint rather than a big new kitchen, I guess is the theme for the time being. But you're right, as interest rates, maybe short rates come down, that sensitivity will start to pick up again. And we just have to recognise the real rates are still pretty high in the United States, certainly relative to history and indeed relative to other economies around the world. So I guess I have two questions. First of all, moving on is tariff impacts. Has there been any sort of anecdotal evidence of shortages of product now because of the tariffs? Have you got a sense of where is the margin squeeze going to? Is it really the importer? Is it the intermediaries importing into the United States, or is the end consumer that is taking the hit on the tariff cost increases?

Chelsea Wiater:

Yeah, I think that your point on the inventory availability is an interesting one, and we have not yet heard of any significant shortages in available inventory. I think a lot of consumer discretionary companies in particular were pretty hesitant in terms of bringing in a tonne of inventory leading into the tariffs. Obviously you want to pre-buy so that you're not being hit following the tariff rates, but at the same time you don't want to overbuy a specific category. And so I think generally inventories are at a good level across the spectrum of the industry. But in terms of who is really bearing the brunt of the tariff impact so far it has been the importer that has taken on almost the entirety of the margin hit. So work that I've seen suggests that consumers are taking on about 35% of the incremental tear of costs through higher prices that they're paying, but the importer has absorbed about 55% of the incremental cost.

So they are the ones taking that incremental margin hit. And if you think about the drivers of this, for most of those importers, they're coming off a period in 2024 where they were experiencing very strong margins, wage inflation had moderated the supply chain, the freight cost impacts had all moderated, and so margins were actually quite high at the end of 2024. And so this is quite a good time for these incremental costs to happen. But I think it's really important to show that in the US importer is really inherently invested in protecting demand, particularly in an environment where the consumer may be a little bit more cautious, like we have already talked about. It's good to see that they're willing to take that margin hit. And then of course if the exporters, those companies have absorbed about 10% just trying to be competitive and make sure that it is their goods that gets selected, that the business doesn't leave their country for a company or another country that has maybe a lower rate.

Moz Afzal:

And I guess that's very interesting. So 35, 50 and the 10 to 15 really from the exporter itself, I think that's probably a nice way to think about how this has happened. I think your point about record high margins coming into this period is very interesting because it does suggest they can see through it and then really wait for interest rates to come down. And the offset started to come into 2026, I guess.

Chelsea Wiater:

Very much so if we look at the cadence of guidance over the last several quarters from consumer discretionary companies, 24 fourth quarter, very strong numbers being reported across the board. But because of the timing of those earnings reports in mid Jan, mid Feb, early March, there was no real reason for those companies to guide aggressively given the backdrop of the concern about tariffs. And so what we saw was a setup with many of these companies where they were coming off peak margins, excellent demand generation, great products, and they said, not really sure what's going to happen in 2025. So we think flat to slightly up, fast forward to the first quarter earnings reports that we saw in May, and we still saw from the vast majority of companies that they were saying, look, demand is still there. My consumer is strong to quite strong. My margins are still solid because we hadn't seen the tariff numbers in the figures yet.

We saw an environment where again, companies were just reiterating guidance and they were barely starting to even comment on tariffs. Something like 35% of companies even embedded any tariff number into guidance in consumer discretionary companies because they just didn't have the information yet because there was so much volatility around and so much movement in the actual tariff rate. So we've now gotten through to the second quarter numbers where we've seen an environment where there is a tariff impact, and it was a huge sigh of relief from the investment community to see these numbers come in and come in quite strong for the vast majority of companies. So a lot of upside surprises and I'd say with the guidance that we were seeing, we're now starting to see a lot of guidance raises still conservatively still just taking the two Q beat and embedding that in the forward looking number. But I think that sets us up quite nicely for back to school and for holiday figures coming into the back half of this year. And I would have to go back pretty far to think of a year where back to school and holiday were this unimportant to the full year guide as they are for so many companies in my area as they are right now. So I think that's a really wonderful setup in terms of investor expectations for the names in the consumer discretionary space.

Moz Afzal:

Yeah, I think that's spot on. I think what was interesting is where we were going into Obliteration Day, or sorry, Liberation Day.

Chelsea Wiater:

You can call it that.

Moz Afzal:

Yeah, we saw the stocks reacting very, very negatively all the way up until the earnings numbers started to come out. And suddenly it was like, oh, okay, it's not so bad. And this time you've got these odd situations where even if guidance is flat and we've seen very high profile companies is guiding flat, the stocks up 20%. It is quite extraordinary in terms of how I say conservative companies have been, but investors even more conservative than the companies have been. So I think you're right. So you talked about the earnings, you talked about the holiday setup. So the last few minutes, I want to talk some about the some fun stuff that you come across. These are kind of fashion trends. So maybe let's start with female and then male. So what is a hot product for females going into Christmas?

Chelsea Wiater:

You know I'm not sure that I have the ability to take that read quite yet. We're still very early when you look at how consumers start spending into holiday, the number of consumers that buy into holiday at this stage in early September is very low. It's something like 10%. So I think I could have a better answer for you in about mid-October, but I would certainly say from a trend perspective, beauty tools have been very hot products for ladies in holiday.

Moz Afzal:

What does beauty tools actually mean?

Chelsea Wiater:

Beauty tools, some of the most exciting innovations in the beauty landscape are these LED red light facial products that you basically take a mask, it's got LED red lights and you wear it for about three minutes a day and it clears your skin in a way that you could typically get at a salon for several thousand dollars, but instead you can get this wonderful product that you can use day in and day out for months and months and months for only $500. So that's an extremely giftable product that has a huge volume on social media. You've probably seen a couple pictures of celebrities and just those giant red glowing masks. It's a little bit.

Moz Afzal:

So that's what that was. I was wondering.

Chelsea Wiater:

Yeah. But that's exactly the type of product that most people are looking to gift is maybe you don't have it in your pocket capacity to go to a salon and spend thousands of dollars on treatments. But now there's been revolutionary updates in at-home beauty capabilities. So those are very, very popular giftable opportunities in the holiday.

Moz Afzal:

Okay, that's interesting. So anything for men, anything you've noticed out there for men? What should Mrs. Afzal get from me for Christmas this year?

Chelsea Wiater:

I would say men are much more dependent on where they sit generationally. Younger men tend to buy more exciting gadgetry type stuff. So an interesting consumer electronics piece is something like a health tracking ring that interfaces with your phone and you have the ability to be better about your health through some technology wearable devices. I would say a little bit older of generations are looking more into exciting tools for the home. So the way that first comment about women having the beauty tools at home, the ability to have new tools in your backyard to be able to make sure that your lawn looks pristine for your neighbours. Men in the US really like to buy the best mower or the best leaf blower to make sure that their lawn looks really exceptional relative to the neighbours. So I would say those are sort of some of the differences between the species, if you will.

Moz Afzal:

So Chelsea, I think it is been an interesting and very fascinating walk down the US consumer. Thank you very much and great to have you. So that wraps us up for Beyond the Benchmark this week, and we look forward to speaking to you again very soon. Thank you very much.

 

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