Meredith Whitney Says Lower-End Consumer Going Through Recession

Bloomberg

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00:00I do want to start off with the consumer, because there's been a lot of focus on that,

00:03particularly with a lot of the government data now starting to be released. And there's a long

00:08term trend that we've been talking a lot about on this show, how if you're higher income,

00:12you're probably doing OK. You're probably still spending. But at the lower end of the spectrum,

00:17we've continued to see deterioration there. And I'm wondering, when does that become

00:22an actual market event? Well, the lower end consumer, unfortunately, does not

00:28matter that much to the overall economy because the higher end consumer contributes over 60% of

00:35total spending. So while the lower end consumer is struggling and has been struggling, and I would

00:40say, I would argue that they're going through their second recession inside of three years. The first

00:46was triggered by the stoppage of COVID stimulus checks. And so that change was a dramatic change

00:55for the lower end consumer, whose after tax income rose considerably with the COVID stimulus checks.

01:02And then now, because of wage pressure, because of inflation, and because of loss of jobs, really

01:11with the travel, leisure and hospitality segment, I think there's going to be more pressure there.

01:16But one thing that I have found that has been very interesting, and so I look at data from under

01:24every stone, because I'm a data junkie, is one area that has powered consumer discretionary spend has

01:34been what I call the avocado toast generation. So this is the 24 to 38-year-old, older Gen Z, and younger,

01:45and younger millennials. And they carry 52% of student debt. And with the resumption of student

01:53debt payments, they've really been impacted. And for the very first time on third quarter earnings,

01:59this was two weeks ago, Sweetgreen, Cava, Chipotle commented that this was impacting their business.

02:07And if you think about what businesses have done over the last five years, forbearance or students

02:15weren't required to make debt payments on their student debt since COVID. So that's almost five

02:20years. That's 200 bucks a month for five years, which is incremental spending that doesn't exist

02:26anymore. And by comparison, total COVID stimulus checks were $812 billion that went out to 165 million

02:35Americans. Debt forbearance for student lending was roughly $400 billion and went out to 42.7 million

02:45Americans. So that's real concentrated excess discretionary spend that is not filtering through

02:52the economy anymore. And I think that's stinging hard. Well, let's talk about some of the companies

02:57that are really feeling the burn here. You mentioned a few of them, but you think about

03:01Cava, Sweetgreen, Chipotle. I'm looking at year-to-date charts here. We're talking about

03:05a double digit and then some losses in a lot of these names, Meredith. And it sounds like you're

03:10saying that that pain could continue quite in a big way here. Oh, I think I don't see any way around

03:17it not continuing. You have retailers like Urban Outfitters, any retailers that have really shifted

03:26their marketing over the past five years thinking that this was a permanent trend when really it was

03:32a desert mirage fueled by government spending is up for a rude awakening. Now, Walmart is not in that

03:41category. Walmart just continues to just offer a better and better customer experience and they're

03:47just taking market share from weaker competitors. So I expect Walmart to post pretty good earnings

03:55tomorrow. Grocery is still a strong spending category and Walmart just offers great value.

04:03I think that the rubber is going to meet the road when the dollar stores report in a couple weeks.

04:09And I think that they might be challenged. I am curious, Meredith, too, about just kind

04:15of when we talk about the state of the consumer, a lot of changes going on. We're going to talk a lot

04:18about AI today because of NVIDIA. And there's been a lot of discussion about how that reshapes our

04:22economy, whether we end up losing a lot of jobs or whether those jobs just shift to somewhere else.

04:27I mean, you wrote a great book, I think, about 10 years or so ago that kind of talked about some

04:31of the shifting sands in our economy. And I am curious, if you look at the current

04:35AI boom that we're in, and it is certainly a boom, whether it's a bubble, that's another question.

04:41But do you see that having a fundamental impact overall on what our economy ends up looking like

04:46in the future? Yeah, I think that we talk a lot about AI and the impact on jobs. But if you look

04:52at, if this is a word, robotization or automation, Amazon said that they'll reduce headcount by 600,000

05:01employees by 2030. That's half of their workforce. And that's not solely AI driven. That's driven by

05:09AI automation in the warehouses, in the fulfillment centers. So I think there's a confluence of a bunch

05:16of things that are going on in the economy that are really going to pressure jobs. And it's hard

05:24pressed. I think psychologically, managers think that AI will ultimately reduce jobs, but AI is not

05:33good enough yet to replace, replace jobs. I mean, you really have to train and work with it to model

05:41it the way the way you need it to. And I just don't think I think it's helping. But I don't think it's

05:46it's there yet. Not to say suggest that it won't be there. But I think an equal threat is robotization

05:53and automation. And Meredith, let's talk directly about AI a little bit here, because we're counting

05:59down to Nvidia earnings after the bell. And one of the big overhangs this specific earnings cycle is

06:04whether or not we're going to see a return on investment. And a new detail is basically about

06:09the circularity of a lot of these deals that are being signed between these AI giants. And I wonder,

06:15you know, from where you're sitting, what you make of that, whether that's a cause from for concern in

06:20your view as well. Well, I mean, the circulatory argument does not read well, and it doesn't

06:26it doesn't sit well. But leave that aside. I just got back from China on Sunday. And there is so much

06:36demand for Nvidia chips there. There's more demand than there is supply. And, you know, they're getting

06:44them by circuitous routes. But there is so much demand for those chips. So I think that I think the story's

06:52real. I expected Nvidia to have a, you know, a good quarter, I'd be surprised if they didn't, because,

06:58again, there's more demand than supply. But I think the AI story is real. I mean, there's so many bad

07:07stories about circular investing. You know, I'm not close enough to know how suspect these deals are.

07:17Yeah.

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