investment viewpoints

Are consumers preparing to cut back?

Are consumers preparing to cut back?
Henry Johns - Junior PM/Analyst of European Equities

Henry Johns

Junior PM/Analyst of European Equities
Florian Ielpo, PhD - Head of Macro, Multi Asset

Florian Ielpo, PhD

Head of Macro, Multi Asset

One of the key surprises amid recent corporate and macro data has come from consumers, with the Q3 US GDP report containing the tantalising figure of 4% consumption growth. But some market signals and corporate earnings reports point to a potential spending slowdown in the future. In this weekly edition of Simply put, we shop data aisles to form a view about whether the trend of consumers’ resilience will continue.   


Need to know:

  • The US consumer has surprised both economists and our nowcasting indicators, as consumption grew by 4% , according to the Q3 US GDP report
  • The Q3 earnings season presented a mixed picture. Pockets of strength were offset by companies reporting that consumers are downtrading: switching to less expensive brands
  • Looking forward, economists expect consumption to weaken and some earnings reports show weaker guidance across sectors


The mighty US consumer…

In one aspect, the US Q3 GDP report surprised on the upside: after a modest Q2, consumption is anticipated to have grown by 4.5% in annualised terms, with the initial estimate being 4.9%.

If positive consumption was not a surprise in itself, its strength was. On average since 1989, US GDP has tended to be marginally stronger over Q3 than preceding quarters, as shown in figure 1. But that excess growth has remained in the region of 0.4%, historically. This high point is also not unusual in the context of 2023, as Q1 consumption growth in the US reached 3.8% (with an initial release at 4.3%). In 2023, consumption in the US has been one of the strongest supporting factors for both the economic cycle and corporate earnings globally. Can this continue?


FIG 1. US quarterly consumption growth vs macro consensus

Source: Bloomberg, LOIM. Note: the lighter bar on the chart on the left is the current macro consensus. For illustrative purposes only


… is tightening their belt?

Over Q3, our nowcasting indicator for US growth showed that 75% of consumption data were rising – a high reading that is consistent with the recent and positive surprise (see figure 2). Since then, the percentage of improving data has clearly rolled over and now sits slightly below 50%, and the latest data points for Q4 suggest that consumption is weakening.

In the eurozone, however, consumption remains quite strong. According to the diffusion index attached to our European growth indicator, about 80% of relevant data are improving.

In summary, the macro data indicate that in Q4 consumption will deteriorate in the US but improve in Europe. Is this view mirrored in company-level data?


FIG 2. Improving consumption data in our growth nowcasters (%)

Source: Bloomberg, LOIM. For illustrative purposes only.


Looking under the microscope

To answer this question, two points must first be considered:

  1. Consumption patterns in Q3 varied by region. The data in figure 3 include a 1% uplift for US and European corporates and 5.4% rise for emerging ones when it comes to consumer discretionary. Growth for consumer staples companies was weaker. Overall, on a global basis, consumption was stronger than the average sector
  2. Despite the headline strength of Q3 earnings reports, some of the accompanying data were painted a sombre picture – notably of ‘downtrading’, where shoppers opt for cheaper products. This behaviour typically eludes macro datasets


FIG 3. Q3 2023 sales growth surprise by zone

Source: LOIM, Bloomberg. For illustrative purposes only.


Downtrading all over the shop

A quote from one of our brokers summarises the situation well:

“After a strong Q2, the Q3 earnings season has been disappointing. The key issue was revenues – whilst pricing has held up, volumes have been weaker….[resulting in] the lowest level of companies beating revenues in years.”

The growing prevalence of downtrading has led us to reconsider our perspective on consumer strength. As macro conditions deteriorate, consumers move down the quality ladder in search of cheaper options.

Such behaviour was notably reported by consumer staples companies such as Church & Dwight(owner of brands such as Arm & Hammer, which produces goods including laundry detergent, cat litter and toothpaste) and  Colgate’s Hill’s brand of pet food, which is observing consumers switching from wet to dry food.

In the consumer discretionary sector, the strong numbers generated by McDonalds highlighted how it has benefited from consumers trading down from pricier eating-out and take-away options. The weak demand environment in luxury goods, particularly in more cyclical categories such as cognac, is also consistent with a more constrained consumer.

Our micro reports for Q4 suggest a potentially different narrative than for Q3, one characterised by subdued expectations for consumer-discretionary firms. Some pockets of strength seem durable, such as travel, personal care and small kitchen appliances, but there are broader indications that consumers are under pressure.

This situation chimes with what our nowcasting signals are telling us, leading us to view consumption is a rising macro risk now.


Simply put, beyond the surprisingly strong Q3 consumption data, we are cautious on the outlook given the deteriorating prospects of US consumers in light of the macro indicators and micro comments. 


[1] Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document


Nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises designed to track the recent progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

  • Growth declined this week, mainly as the reflection of weaker US data. Our indicator fell below the 30% line, which is usually a bad sign for growth 
  • Inflation increased this week, notably reflecting the building of cost-driven pressures in the US 
  • Monetary policy developments point to an upcoming dovish stance from the Federal Reserve in the coming months 


World growth nowcaster: long-term (left) and recent evolution (right)

World inflation nowcaster: long-term (left) and recent evolution (right)

World monetary policy nowcaster: long-term (left) and recent evolution (right)

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The Nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).

important information.

For professional investors only

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This document is approved at the date of publication.

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.

UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation scheme does not apply in respect of any investment or services provided by an overseas person. A summary of investor rights and information on the integration of sustainability risks are available at:

Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorized and regulated by the FCA. ©2023 Lombard Odier IM. All rights reserved.