Consumer Spending Loses Steam? ETFs to Gain/Lose

Tax Refund Boost May Fade

Goldman Sachs economist Jan Hatzius expects consumer spending to lose momentum in the second half of the year. Hatzius said the spring strength in real consumer spending was likely supported by a surge in tax refunds, a boost that may not persist, as quoted in the same Yahoo Finance article.

While July retail sales were partly affected by an earlier-than-usual Amazon Prime Day, the revised data appear more consistent with Goldman Sachs' view that consumer spending is set to moderate.

Retail sales grew 0.6% in July from a year earlier, missing the estimate of a 1.5% jump and slowing from 1% growth in June, as quoted on CNBC. Goldman Sachs expects real consumer spending growth to slow to 1%-1.5% in the second half as real household cash flow stagnates, as quoted on the same Yahoo Finance article.

Income Divide Is Emerging

Despite the overall resilience, consumer behavior is becoming increasingly uneven.

Procter & Gamble CFO Andre Schulten recently said higher-income consumers continue to spend on the company's latest innovations. Meanwhile, lower-income shoppers remain cautious about when they refill household products and which items they purchase.

This growing divide could become more visible if household cash flows weaken in the months ahead. Data from the Federal Reserve Bank of Atlanta shows wages for the highest-paid workers are rising faster than wages for the lowest-paid workers, as quoted on marketplace.org.

Deutsche Bank analyst Krisztina Katai cautioned that generating incremental sales could become more difficult in an environment where consumers are cautious and retailers may need to rely more heavily on promotions, as quoted on the above-mentioned source.

Growth Hinged On Consumers in Q2: Tough Time in Q3?

The potential slowdown comes as the broader U.S. economy is already losing momentum. GDP grew at an annualized 1.5% pace in the second quarter, down from 2.1% in the first quarter.

Consumer spending, however, accelerated sharply to a 3.2% annualized rate from just 0.5% in the first quarter, making it the primary driver of underlying private domestic demand.

As the U.S. consumer remains a key pillar of economic growth, fading tax-refund support, stagnant real cash flow and increasingly cautious lower-income shoppers could weaken spending momentum in Q3.

ETFs to Gain

State Street Consumer Staples Select Sector SPDR ETF XLP

Consumer staples may gain even if U.S. consumer spending weakens because these companies sell essential goods that people continue to buy during economic slowdowns. Their defensive nature and relatively stable earnings can also make them more attractive to investors amid rising economic uncertainty.

VanEck Retail ETF RTH

The fund provides exposure to retailers that can benefit from resilient spending among financially stronger consumers. With the U.S. economic recovery being K-shaped, ETFs focused on higher-end retailers should gain.

State Street Financial Select Sector SPDR ETF XLF

Higher-income households with stronger balance sheets, along with resilient credit demand, can support financial companies and related ETFs like XLF.

State Street SPDR Portfolio S&P 500 Growth ETF SPYG

If consumer spending slows, the labor market weakens, and inflation remains sticky, the Fed is likely to stay put at its upcoming meetings. If interest rates remain relatively low, growth ETFs like SPYG should perform well.

ETFs to Lose

Invesco S&P 500 Equal Weight Consumer Discretionary ETF RSPD

If discretionary spending slips in the coming days, the RSPD ETF may feel the pinch. The fund does not put more than 3% of its assets in a single stock.

iShares Russell 2000 ETF IWM

Small-caps may fall if U.S. consumer spending weakens, as slower demand can hurt the revenues and earnings of smaller, domestically focused companies.

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This article originally published on Zacks Investment Research (zacks.com).

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