Third-quarter earnings are indicating a divided economy

With more consumer companies preparing to report third-quarter earnings this week, Wall Street will be on the lookout for signs of a bifurcated or “K-shaped” economy as consumers differ in their spending behavior.

There are growing signals that wealthier Americans are spending more, while lower-income Americans are significantly reducing their spending. Low-income consumers were the most affected by rising inflation and price increases in basic necessities; The September consumer price index report shows an annual inflation rate of 3%, with a monthly increase of 0.3%.

Shortly after the CPI report was released, the Federal Reserve approved its second consecutive rate cut on Wednesday, lowering the benchmark overnight borrowing rate to a range of 3.75% to 4%.

Meanwhile, the country is entering its fifth week of a government shutdown, and many federal workers are without pay.

The Census Bureau estimates that 35.9 million people will be in poverty in 2024, based on the most recent data available; The weighted average poverty threshold for a family of four comes in at $32,130. Meanwhile, median household income was $83,730 last year. desk.

Income for the top 10 percent of households rose 4.2 percent between 2023 and 2024, but there was no meaningful change for the bottom 10 percent, the bureau said in September. As of last year, there were approximately 33 million households in the top 10 percent income group and 33 million households in the bottom 10 percent income group.

Consumers with the most purchasing power benefited from stock market rallies and rising home values. Data: JPMorganThe Cost of Living Survey found that higher-income consumers reported stronger economic confidence for the coming year.

The latest earnings reports from companies that touch every corner of the economy show that the K-shaped trend is starting to take hold. This week the companies are: Yum Brands, McDonald’s, Elf Beauty, Tapestry And Under Armor They are preparing to release their quarterly earnings reports and may report similar trends.

Last week, chipotle It reported that consumers who earn less than $100,000 a year, which make up about 40% of the company’s customer base, are seeing them spend less due to concerns about the economy and inflation. CEO Scott Boatwright said the company saw “consistent macroeconomic pressures” with a 0.8% decline in traffic in the quarter.

Coca Cola In its third-quarter earnings call, Topo Chico said pricier products like sparkling water and Fairlife protein shakes were driving growth. Procter & Gamble reported similar results; He said affluent customers were buying more from club retailers selling larger pack sizes, while lower-income customers were holding back significantly.

And some of the companies reporting this week have already indicated they may face similar behavior. In early September, McDonald’s CEO Chris Kempczinski told CNBC’s “Squawk Box” that the expansion of the chain’s value menu was due to “two-tier economics.”

“Traffic to low-income consumers is in double digits, and that’s because people are either choosing to skip a meal or just choosing to eat at home,” he said.

The trend is not just limited to food and beverage. In the auto world, consumers who can afford new vehicles are going crazy, while those who are more price-constrained are being left out. As the average price of a new vehicle breaks records, delinquencies and repossessions are on the rise.

And in the service sector, Hilton Earlier this month, it reported that its affordable brands were seeing a decline in revenue, while its luxury brands were performing extremely well. Still, CEO Christopher Nassetta told CNBC last month that he didn’t expect the fork to last much longer.

“My belief is that as we look into the fourth quarter and especially next year, we’re going to see a very big shift in those dynamics, so I don’t think you’re going to continue to have this bifurcation,” Nassetta said. he said. “That doesn’t mean I think the upper bound will get worse or get worse. I just think about the middle and lower bound [are] We will move upwards.”

Correction: This article has been updated to correct the month of the CPI report.