A key part of the economy is showing signs of deteriorating

The warning signs for the U.S. consumer are starting to build as pivotal holiday shopping season nears and the Federal Reserve considers when to stop hiking interest rates. While consumer spending data has been surprisingly resilient this year, there are signs that household wallets may have hit their limit. That’s critical since consumer spending accounts for roughly 70% of all economic activity in the U.S. Major retailers like Target and Dick’s Sporting Goods have cut their guidance in recent weeks, and UBS analyst Jay Sole said in a note to clients Tuesday that the outlook for holiday sales is headed in the wrong direction. “We asked consumers about their Holiday season spending plans in July and September. The percentage of consumers who said they plan to spend less this Holiday season jumped 840 [basis points] sequentially, while the percentage who said they plan to spend more rose only 340 [basis points]. This 500 bps spread is the 2nd highest in 12 years,” Sole said. 500 basis points are equal to 5%. The warning signs are building as Fed officials wrap up their September meeting on Wednesday, when central bankers are widely expected to skip a rate hike. The goal is for the Fed to bring down inflation and cool off the labor market while avoiding a recession, a so-called “soft landing,” but that requires the consumer to keep spending. Wolfe Research strategist Chris Senyek said in a note to clients Tuesday that trends like a falling quits rate — the number of people who quit their jobs each month as a percentage of employment — and rising loan delinquencies are signs that the consumer is under pressure, even if wages continue to climb. “The U.S. consumer will determine whether or not the U.S. economy glides down for a ‘soft landing’ in the months ahead. As we’ve previously discussed, we believe that cracks are starting to show,” Senyek said. “While wages should continue to rise, we believe that a majority of consumers view recent raises as a ‘catch up’ for high inflation experienced in the post-Covid world,” Senyek added. On Wall Street, slower consumer spending would spell particularly bad news for retailers that are already struggling. The SPDR Retail ETF (XRT) is down more than 4% in the third quarter and has badly underperformed the S & P 500 this year. XRT YTD mountain Retail stocks have underperformed in 2023. The UBS note argued that retail stocks still have further downside. “We believe both sell-side EPS estimates and Softlines stock [price-to-earnings valuations] will fall,” UBS’s Sole said, referring to clothing, bedding and other retailers known as “softlines” sellers . “We continue to have high conviction that what matters for Softline stocks is the ‘rate of change’ in the softgood spending environment. We believe Softline industry sales growth trends will deteriorate and this will lead to further P/E compression.” — CNBC’s Michael Bloom contributed reporting.