Don't blame the American consumer as the market enters correction territory.

• Despite the S&P 500 and Nasdaq being in correction territory, many consumer earnings data points indicate a mostly bullish outlook.
• Mortgage buydowns are aiding in the increase of home sales, fliers are still paying for premium seats, and Amazon is currently hiring 250,000 seasonal holiday workers.
• "JPMorgan chief financial officer Jeremy Barnum responded to an analyst's question on the bank's earnings call by saying, "Where am I seeing softness in consumer credit?" and adding, "I think the answer to that is actually nowhere.""

Despite the initial third-quarter report on gross domestic product showing consumer spending increasing by 4% percent annually, after inflation, the best in nearly two years, and September's retail sales report indicating spending rising almost twice as fast as the average for the previous year, hedge-fund trader Bill Ackman predicts a recession will occur this quarter and the market has entered correction territory.

The S&P 500's consumer-discretionary companies reported an average profit gain of 15% through Oct. 25, indicating that consumer spending remains mostly good, according to CFRA. This represents the biggest revenue gain among the stock market's 11 sectors.

"According to CFRA Research strategist Sam Stovall, people are saying that consumers are performing better than expected. Consumers are still buying goods and pursuing experiences, and they don't seem concerned about their debt levels."

With interest rates on various items such as credit cards, cars, and homes increasing, how can people manage their finances effectively?

The real story is revealed through anecdotes from prominent companies in various industries, particularly those that are selling their most expensive seats at a rapid pace. Homeowners are utilizing mortgage buydowns to combat high-interest rates. Additionally, a recent report from a clothing retailer disclosed a 28% increase in sales of a mature line, Uggs, which was a significant contributor to a 79% profit gain and a 19% increase in share price.

The economic data is generally positive, but there are some negative aspects. The earnings reports of the largest companies in the market provide evidence of how companies and American consumers are adapting to a challenging interest rate environment.

How homebuilders are solving for mortgages rates

While the housing industry has been hit hard by the decline in existing home sales, which have dropped almost 40% from Covid-era peaks, new home builders have reported positive news.

New home sales are up this year due to builders offering mortgages at lower rates than existing home sellers. Builders are paying for these lower rates by dipping into money that was previously used for other incentives. This strategy has helped drive profits and new home orders for builders, with TRI Pointe Homes seeing an 8% third-quarter profit jump and 43% climb in new home orders for delivery later.

"Redistributing incentives from cabinets and countertops to interest rates has been the most powerful thing we've done," said PulteGroup CEO Ryan Marshall.

Pulte offers incentives worth approximately $35,000 to sell each home, which is about 6% of the home's price. Out of these incentives, about 80% to 85% of buyers are taking advantage of the mortgage buydown offer. However, many buyers are opting for a combination of a smaller rate buydown and keeping some funds for the house.

Jackie Benson, an economist at Wells Fargo, stated in a report that builders may face challenges in maintaining their strategy if mortgage rates remain at 8%. Despite a 12% drop in new-home prices over the past year, Benson believes that incentives and larger price cuts than most existing homeowners are willing to offer are helping builders gain an edge.

At auto companies, price cuts are in, and more are coming

In September, car sales increased by 24% compared to the previous year, surpassing the year-to-date increase in unit sales. However, electric-vehicle leader sales were below expectations, and Tesla also experienced lower-than-expected sales, citing high interest rates as a reason.

"Tesla CEO Elon Musk stated on the earnings call that for most people purchasing a car, it's primarily about the monthly payment. As interest rates rise, the percentage of that monthly payment that is interest also increases."

Despite the strike by the United Auto Workers union, investor reaction to good numbers at GM was muted.

Despite beating earnings expectations by 40 cents a share, GM's shares fell 3% due to investor concerns about the strike. Meanwhile, Ford, which settled with the UAW on Oct. 25, reported a "mixed" quarter with profit missing Wall Street targets due to the strike. However, consumers came through, as unit sales rose 7.7% for the quarter, with truck and EV sales both up 15%. GM CEO Mary Barra stated on the company's analyst call that they gained market share, posting a 21% gain in unit sales despite offering incentives below the industry average.

While consumer sentiment may be weakening, we haven't seen it reflected in demand for our vehicles, according to GM CFO Paul Jacobson. However, Ford CFO John Lawler believes car prices need to decline by approximately $1,800 to become affordable again, which he predicts will take place over the next 12 to 18 months.

Tesla's turnaround plan is centered on reducing the cost of producing cars, which decreased by approximately $2,000 per vehicle in the previous year, according to the company. With federal tax credits for electric vehicles, a Model Y crossover can be purchased for around $36,490, or as low as $31,500 in states with local tax incentives for EVs. This is significantly below the average for all cars, which Cox Automotive estimates to be over $50,000. Despite this, Musk believes that some consumers are still not convinced.

"Comparing the price reductions we've made in the Model Y to the rise in monthly payments due to interest rates, the Model Y's price remains almost unchanged, making it unaffordable for people."

Most banks say the consumer still has cash, but not Discover

To determine consumer spending habits, inquire with credit card companies, who typically disclose this information quarterly. To assess consumer confidence, ask banks, who often provide this information alongside their quarterly disclosure of consumer balances.

In most cases, financial services firms say consumers are doing well.

Consumer balances at J have decreased by 3% in the past year, but delinquencies have decreased during the quarter, according to the company.

"Jeremy Barnum, the chief financial officer, responded to an analyst's question on the earnings call by stating that he sees no softness in consumer credit, saying, 'I think the answer to that is actually nowhere.'"

The "resilient" narrative remains the focus among credit card companies, with the term "resilience" being used eight times to describe U.S. consumers in their Oct. 26 call.

Sachin Mehra, MasterCard's chief financial officer, stated that unemployment levels are near all-time lows.

The mild surprise was that young consumers were adding Amex cards faster than any other group, as seen at the time when U.S. consumer spending rose 9%.

Stovall remarked, "It seems like they're not concerned about the restart of student loan payments."

Discover's profit dropped by 33% due to one of the few banks that increased its loan loss reserves for consumer debt, resulting in a doubling of loan chargeoffs.

Although U.S. household debt burdens are still the same as in late 2019 and decreased during the quarter, Discover CFO John Greene stated on their call that their macro assumptions reflect a strong labor market but also consumer headwinds from a declining savings rate and increasing debt burdens.

At airlines, still no sign of a travel recession

Delta Air Lines is currently experiencing a 59% third-quarter profit gain due to the popularity of their first-class seats and international vacations. On the other hand, United Airlines saw a 25% increase in higher-margin international travel and plans to add seven first-class seats per departure by 2027. However, discounter saw their shares fall after reporting a $157 million loss.

Despite evidence from daily government data and consumer surveys indicating that a travel recession is unlikely, Delta's third-quarter beat and solid fourth-quarter guide and commentary should ease concerns about a consumer "cliff," allowing the group to relax and move around freely on the plane, according to Morgan Stanley analyst Ravi Shanker in a note to clients.

United is adding 20 planes this quarter, but is pushing 12 more deliveries into 2024, while Spirit is delaying plane deliveries and focusing on its proposed merger with JetBlue and cost-cutting to regain competitiveness as soft demand for its product persists into the holiday season.

Sundaram stated that in 2023, high-income consumers have been performing better than moderate-income families.

The goods recession is for real

After reporting bad earnings, all mattress makers saw their stocks tumble, experiencing sales struggles consistent with the macro data.

During the pandemic, people increased their purchases of household goods as they spent more time at home. As a result, all three companies experienced an increase in their stock prices. However, since the market has become saturated and consumers have shifted their spending towards travel and other services, the growth rate of these companies has slowed down.

"Sundaram exaggerated, saying, "The furniture industry received all of the stimulus money," while adding, "They've been falling apart for the past year.""

Ethan Allen's sales decreased by 24%, according to the company, due to a flood in a Vermont factory and weaker demand. Meanwhile, Whirlpool reported that its sales to consumers were slowing, and CEO Marc Bitzer stated that "discretionary purchases have been even softer than anticipated, as a result of increased mortgage rates and low consumer confidence." As a result, Whirlpool's shares fell more than 20%.

Amazon's $1.3 billion holiday hiring spree

Amazon is investing $1.3 billion to increase its holiday workforce, primarily in fulfillment centers.

Amazon has experienced a 11% increase in sales in the last two quarters due to its reorganization of its warehouse network, which has enabled faster and more cost-effective deliveries. Additionally, Amazon serves a more affluent consumer who is less affected by interest rate hikes and inflation compared to audiences for Target and dollar stores, according to CFRA retailing analyst Arun Sundaram.

Sundaram stated that their retail sales are performing exceptionally well, despite the challenges posed by headwinds on discretionary sales. However, everyday essentials are performing exceptionally well.

All of this sets the stage for a high-stakes holiday season.

PNC Asset Management chief investment officer Amanda Agati believes that there will be a recession in early 2024, partly due to the Federal Reserve's rate hikes, and that investors will focus on sales of goods to search for more signs of weakness.

Sundaram believes that retailers are better positioned to increase sales through strategic discounting due to stronger supply chains, as evidenced by the success of Uggs sales, which was attributed to improved supply chains and shorter shipping times.

Despite the challenges faced by consumers, there is a possibility for a successful holiday season, although it may be hindered by the inflation of the past two years. The 2022 holiday season may have been the most difficult.