The latest sign Low-income Americans are stretched thin

With rising home values, strong employment numbers, a booming stock market and low inflation, American household finances appear to be in remarkably good shape.

But Americans are not a monolith, as Jefferies consumer strategist Carey Kaufman pointed out in a note to clients on Tuesday.

“The American consumer is three consumers,” he wrote: the top fifth of the income scale, the bottom fifth, and the middle three-fifths.

Heading into autumn, a sizable number of those in the bottom quintile appear to be working on borrowed time.

Spending signs at auto parts and dollar stores

In contrast to the bullish outlook of stores serving relatively large (and growing) shares of middle- and upper-income customers, auto parts and dollar store retailers tell a more complicated story among their core, higher-income customers. small households.

“When times are good, our main client normally works 30 to 40 hours a week, but also has a side job where he normally works 15 to 25 hours. it’s gone,” Dollar CEO Ted Vasos said earlier this month at the Goldman Sachs Global Retailing Conference.

Vasos said the reduction in income, along with higher prices from the years of inflation, has put increased pressure on lower-income households. If things continue according to historical trends, those concerns are starting to become more serious for the middle and upper income segments as well.

“When things start to go south in the economy, our core customer feels it first,” Vasos said. “We usually see it before most retailers start to feel it.”

Dollar Tree, which owns Family Dollar, reported similar consumer headwinds during its quarterly earnings this month.

Auto parts stores are another category of retail that is especially suited to what happens at the lower ends of the economic scale.

A big part of their consumer-facing business is driven by helping people keep their cars and trucks running smoothly, Mizuho analyst David Bellinger told Business Insider.

“This is the lower end consumer working on their car out of economic necessity,” he said. “So maybe if they don’t have to do a repair, it could be a few months late. That’s how it’s happening now.”

Advance Auto Parts chief financial officer Ryan Grimsland said during the company’s earnings call last month that do-it-yourself customers are putting off “maintenance that you would normally want to see,” such as skipping an oil change or ignoring a check engine light.

That may help stretch the household budget for a while, but as Genuine Parts CEO Will Stengel said earlier this month, “there’s only so long you can put off a problem.”

And repairs aren’t the only auto expense that’s taking a cut. Ally Financial this week reported a weaker-than-expected loan performance in July and August.

“Our borrower is facing high inflation and the cost of living and now, more recently, a weakening employment picture,” said Ally’s chief financial officer Russell Hutchinson, according to Reuters.

One thing deferred maintenance and missed payments have in common is that they are both problems that get more expensive over time. No one wants to be stuck on the side of the road or chased by collection agencies, but more people hope to get one day or week at a time.

Indeed, as Dollar General’s Vasos noted, wages aren’t moving as far as they once did.

“What we saw was an even tighter consumer base in the last week of each month in Q2,” he said. “While this is always a tighter week of the month for our core consumer, it was by far the weakest.”

The Federal Reserve’s expected interest rate cut next week won’t solve these difficulties overnight, but it could signal that an improvement is on the way.

Interest rate effects take some time to work through the economy, Bellinger noted, as large purchases are financed, work hours are scheduled and business activity returns.

With any luck, however, the creeping sense of economic anxiety could begin to ease, not just for the middle class, but also for households that have borne the brunt of America’s war on inflation.