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Consumer confidence numbers are ‘encouraging,’ analyst says

Goldman Sachs Lead Equity Analyst Jason English joins Yahoo Finance Live to discuss the newly-released September consumer sentiment data.

Video Transcript

- OK, let's talk more about this with the consumer. Now, Jason English, Goldman Sachs lead equity analyst. We won't discuss his favorite canned soup, at least not right now. I know you got a sell rating on Campbell, for that matter, Jason. But let's start broad, shall we? And talk about this consumer confidence rating we just got. It sounds like it is little changed here. What are we seeing in terms of the feedthrough how consumers are feeling to what they're actually doing and spending?

JASON ENGLISH: Yeah, hi. Thanks, Julie. Thanks for having me. So we've seen spending remain pretty robust throughout this year. And now, as Brad pointed out, a lot of the reason that they're spending robustly is because everything costs more. So inflation has been certainly problematic and not leaving a lot of discretionary cash flow left for the consumer at the end of the day to go out and splurge on the durable goods like they had been for some time, and that certainly came through in the FedEx numbers today.

But you are still seeing services surge. I think Brian had the Expedia folks on last week interviewing them at our Communicopia conference, and you heard them talk about how robust the tourism data is and the travel that is. So services PCE is still very robust. Durable goods under a degree of pressure right now. But a lot of this isn't really that alarming. It's just a comparison issue from last year.

When we were in COVID, everyone was locked down. They were flushed with cash. They upgraded their living spaces. They upgraded their electronics. They used a lot of e-commerce. All those things are now fading, and it really just mean reverting back to prior trend line as services catch up. It's creating a lot of distortions and share a wallet shifts, which are rippling through various retailers and various shipping companies in different ways.

But at the end of the day, the spending is still there. And the confidence numbers came out today. Frankly, in my opinion, are reasonably encouraging, especially on the expectation side.

- Do you think that we're or we should rather expect to see some type of turn back over from services spending back to goods, given that much of the services spending, especially that shift that we had seen coming into the summer months, too, perhaps tied into some of the either travel plans or just the ability for people to navigate and move about, not just the country, but more internationally this summer than summers past?

JASON ENGLISH: Yeah, we should, Brad, but it's going to take time. So a statistic I like to share with people, from the fourth quarter of 2020 to the third quarter of 2021, so that's fourth quarter an annualized period, the growth of real consumption on durable goods was the equivalent of what historically had been seven years' worth of growth. So there was a huge pull forward of durable goods during COVID, and it's going to take still a few more quarters before we cycle through that and we revert back to trend line.

Meanwhile, the same thing holds for services. We're seeing we're seeing a surge back. It's not just a sort of revenge spend on services. It is a catch-up to trend line, but we probably still have a few more quarters to go there. So I'm still braced for durable goods to be reasonably soft for another few quarters, services to be reasonably robust for another few quarters.

- What's interesting is, Jason, all of this is unfolding as people have less cash, right? This is a point you made in the note to us, which I thought was really interesting. You're looking at something called the consumer's discretionary cash inflow. That's the money they have to either save or spend on discretionary items. And you said it's fallen by 6% through the first half of the year. So it's sort of remarkable if you think about it that you've seen that decline and yet the spending that you're discussing.

JASON ENGLISH: It's remarkable, and then obviously, it creates some concern for folks because of the way they're spending it. So let's just back up real quick. The discretionary personal income is flat year on year because we're lapping on the stimulus, and the lapping of the stimulus is eating into the wage growth we're seeing for the consumer. And then, as Brad mentioned, essential expenditures, the cost to heat your home, fuel your car, feed your family, very inflationary.

So when we contemplate flat discretionary personal income with inflation on essential expenditures to your point, we're left with a 6% year-on-year debit in what's left for the consumer to go out there and spend. We haven't seen a number like that ever in our models. And for context, that decline is three times larger than what we saw in the last recession coming out of the great financial crisis. So it's a jarring statistic. Now, to your point, the consumer is still spending irregardless. They're spending because during COVID, they retained over 2 trillion of excess savings. And what we're doing right now is we're eating into those savings, and we're drawing back down on credit cards.

That, on the headline perspective, can be concerning because you see, this can't last forever, and certainly, it can't. The good news, though, is when we build up this proprietary model discretionary cash inflow, we see a path back to cash inflow growth as early as the first quarter of 2023. So I really only need the consumer to be drawing down on those savings or relevering on credit for another two quarters. We heard on our retail conference loud and clear, and I know Brian was there, that the retailers are seeing it. They're seeing the consumer spend.

There was a slight slowdown in July. They came back in August. They came back so far through back to school in early September, and they spent. I just need a few more months of that spending to bridge us to those better days where cash inflow could be back into growth.

- Jason, you cover a lot of major food companies. Of course, all these major food companies sell into major retailers, like a Walmart, like a Target, that are undergoing massive inventory adjustments. Are there certain food companies that you are concerned about that could get swept up into these inventory adjustments and may not make their numbers?

JASON ENGLISH: Yeah, you've heard, particularly from Walmart and Target, two huge retailers, talk about their excess inventory and the need to discount that to clear it out. It's caused profit warnings. It's important to understand where those inventory imbalances were. They were more on the durable goods side. So everything I talked about, that during COVID, consumers upgrading their indoor and outdoor living spaces, upgrading their electronics, and frankly, upgrading their wardrobe, too.

We pulled so much demand forward. And during COVID, it was really a race for inventory. Inventory, as you recall, was really hard to get with supply chain bottlenecks. So a lot of retailers, including those, over-ordered on goods where demand was sensationalized at an exceptionally high level. We're back to normalization. They over-ordered. We have a correction that has to happen. But that's really more on the durable goods and apparel side. It doesn't really apply to consumer-packaged goods. In fact, service levels there are still low. You're hearing some e-comm vendors who are maybe you consolidating DCs talk about a little bit of destock. But for the most part, that's not really an issue, and I don't expect it to be an issue for consumer-packaged goods.

- All right, we'll leave it there. Jason English, Goldman Sachs lead equity analyst. Good to see you. Good to be at those conferences, too. Have a great weekend.

JASON ENGLISH: Yeah, see you, too. Thank you.