Ashleay: Hello everyone. I'm Ashleay, your host, and with me today is my colleague Sébastien Mc Mahon, Chief Strategist and Senior Economist. Today, we're talking about North American consumer behaviour with our guest, Dan Rohinton. Good afternoon, gentlemen.
Dan: Hi Ashleay.
Sébastien: Hey, Dan. Hello, Ashleay. It's great to be here. It's great to have you Dan. You've been a colleague of us for about a year now. We've been looking to have you on this podcast here. And the interesting thing, you know, we're always talking macro in this podcast, but you have a unique view being a, you know, a portfolio manager who follows multiple sectors here. So, we always talk about the odds of a recession or not, the behaviour of households, behaviour of businesses. So, we thought, well, what better guest than you, Dan, to come here and tell us what you see in earnings calls, what you see, you know, on the ground floor. So, it's going to be good to have you just to make sense of everything that's going on.
Ashleay: And maybe Dan to start everything, to understand the current situation of North American consumers, can we maybe take a quick look back at the major consumer trends over the years, from the pandemic to today?
Dan: Yeah, absolutely. So, I know we're recording episode 68 right now, but when we even record episode 1,000, we'll look back and say what we saw in Covid was the single greatest shift in consumer behaviour in the history of consumer behaviour. And why is that, Ashleay? It's because we were forced, across the world, to shift from services, which is primarily a big source of consumption, to mostly goods and only goods in certain countries. So, we saw a big boom in consumption of purchases of general merchandise, appliances, things for the home, things for lifestyle right here when you're locked in place. And then that led to more cars, more real estate and a lot of other downstream effects. But the victims of that pressure were restaurants, travel and the other services industry that really suffered. So, that big shift in the consumer is going to be with us for years to go in terms of the changes that it led to, in terms of consumer behaviour and also some of the offsets now that things are back to normal.
Sébastien: Yeah. And one of the consequences of that was inflation, of course. You had people staying at home buying more goods than services, as you mentioned. And we had all of these supply chain issues that pushed, you know, it was hard to get a car, hard to get appliances. So, the inflation picture is a very important one in this story. And we're still fighting inflation today. And, you know, I think likely the fight has been partly won in the sense that inflationary pressures, they're not getting worse. But before we get back to the, you know, the infamous, let's say 2% target on inflation in North America, likely it’s a 2025 story even now. So, it's not as immediate. So yeah, lots of consequences. I agree that it was quite a quite a paradigm shift.
Ashleay: And what are the constraints that consumers are currently facing and how are they managing them?
Dan: So, building off of what Sébastien was just saying, which is an extremely important point, is that the higher inflation, driven by some of these changes, led to higher interest rates. So, now that interest rates have risen really fast and quite significantly, the slowdown effects haven't fully been felt. But you are seeing some of those early signs that are really worth monitoring. So, when you look at consumers who have an income below $50,000 as a household—those are considered low-income households—they've seen a big pickup in credit card balances. And it's back to its historical trend as those savings have been depleted. Then, you're also seeing consumers of every shape and stripe actually changing their behaviour, now that the budgets are getting a little bit more pinched and the mortgage costs, the credit card costs, the car costs are getting a little bit more intense and difficult to manage. So, you're seeing downtrading, you're seeing changes in those behaviors where you're shifting away from those general merchandise goods to more staples products, which have become less affordable in the eyes of most consumers. So, we are seeing those dynamics in Canada especially and in the US, with a different lagged effect, but still pronounced and will be with us for years to come.
Sébastien: So, when you look at the, when you listen to the earnings calls, of say people like Walmart or Costco, I think you said earlier that they are starting to report that in the quality spectrum, people are buying different goods now. They're trying to save money at the margin. Right?
Dan: Absolutely. And I'll just build off of that and go to Europe. There's a company called Electrolux which competes with whirlpool for your appliances, your laundry machines, your fridges, your dishwashers. They've seen big declines in organic sales, even after they've been cutting prices to entice consumers, because not only are consumers saturated with some of those products, they're actually having a difficult time financing them and purchasing them. So, we're seeing that downshifting. And it goes across that whole consumer spectrum.
Sébastien: And there are two parts of that. There's inflation taking a bite out of budgets, but also higher interest rates. And, of course, in Canada we have five-year mortgages. In the US, it's 30-year mortgages, meaning that the difference is, well, let's say the timing of the impact is different.
Dan: Absolutely. And you know what? It's one of those things where there's a lot of great things about Canada. But one thing I wish consumers had here was a 30-year fixed rate mortgage, because that would offset some of the pain for the consumers, which the US consumers don't have to face for another 27 years. But in Canada, those maturity walls are coming up in 2024, 2025, and without a doubt, everyone will face the new rate regime by 2026. So, the Canadian consumer has a lot more difficulty ahead of it because the duration of their mortgage especially, which is the biggest debt that most consumers have, is going to be with us way earlier than other parts of the world. So, that is something to be mindful of, and it is going to impact how day-to-day decisions are made by households.
Sébastien: But one of the interesting consequences of that is as an investor, if you are to purchase the stock of a US bank versus a Canadian bank, well, there's less risk on the shoulders of Canadian banks than for US banks based on this aspect.
Dan: Absolutely. And for a US bank, you have a duration issue. You have a securities portfolio valuation issue, which is the capital gains and losses, the other comprehensive income, those nuances and the crevices of bank financial accounting that we love to dig into. In Canada, it's credit losses that we're going to have to keep a closer eye on, because those consumers will have to either pay 6, 7, 8% on certain fixed-income mortgage loans and 15, 20, 30% on credit cards, or they're going to have to find some way to offset those payments through workouts and things like that. So, we worry about duration in the US on the banking side, and we worry about credit losses on the Canadian side. I think both will be manageable over time, but you just have to keep a watchful eye, and that's what we do every day.
Ashleay: So, what's the outlook for consumers over the next 12 to 24 months and what would be the main uncertainties?
Dan: Yeah, absolutely. So, I think as Sébastien mentioned earlier, that the fight to bring inflation down is going to be a long and methodical one, not an instant, declare victory right here, right now. So, as those interest rates are going to roll in, as the consumers continue to get more price sensitive, get more defensive in what they're doing, we think the revenge spending that we've seen, especially in travel and leisure, is going to slow down. It's going to take a step back. It's going to normalize the same way things like short-term accommodations, which had a strong rise after the Covid lockdowns were over, have now really normalized back down. So, I think the story for the next two years is a normalizing and more defensive consumer than there was before. And that's a good thing because it shows that there's discipline on the part of consumers. Now that they've worked down their savings, they're adjusting their spending to reflect the new economic reality that they're facing.
Sébastien: Yeah, it always boils down to the labour market as the stabilizer here. So, let's see how the next quarters unfold on that front. So, maybe one last question Dan, as an equity portfolio manager. We have Black Friday and Cyber Monday coming up. Will you be looking at these data, to these data points to give you some indication about your positioning? How are you going to react or look at this data?
Dan: So, I'm definitely looking forward to Black Friday because I'm in the market for a new TV, so I'm looking forward to the opportunity. But I'll also say from a portfolio manager's perspective, I think that's an important day. And it's not just one day. It's really a week because the e-commerce companies focus on Cyber Monday. There's some deals that come ahead of it. There's deals that come after it. So, it's really more of a week than a specific day now that we're in an evolved retail landscape. But the most important thing I'm looking forward to seeing is the mix of the consumption. So, it's not about “Did sales go up 5%? Did they go down 10%?” That data is a little more difficult to discern. It's the mix of what's going on: Are consumers buying higher-end products, or are they downshifting and taking advantage of even more lower-end brands, things like that? Are they buying big ticket items or are they buying smaller items? Is it a TV or is it a headset? It's those little nuances that are really important because it's about the mentality and the mindset of the consumer, because this is their opportunity to shop, get discounts, and really express their opinions through the dollars and out of their pockets.
Ashleay: That is very interesting. Well, on that note, we will end for today. But thank you so much, Dan, and thank you, Sébastien. I hope everyone enjoyed today's episode at home as much as I did, and we'll see you next week. Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms, visit the economic news page on ia.ca or follow us on social media.
About
Sébastien has nearly 20 years of experience in the public and private sectors. In addition to his roles as Chief Strategist and Senior Economist, he is an iAGAM portfolio manager and a member of the firm’s Asset Allocation Committee. All of these roles allow him to put his passion for numbers, words, and communication to good use. Sébastien also acts as iA Financial Group’s spokesperson and guest speaker on economic and financial matters. Before joining iA in 2013, he held various economic roles at the Autorité des marchés financiers, Desjardins, and the Québec ministry of finance. He completed a master’s degree and doctoral studies in economics at Laval University and is a CFA charterholder.
Sébastien Mc Mahon and Danesh Rohinton
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