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YOLO before you go-go — Millennial consumers defy downturn talk
William Hoffman
•6 min read
One of the most highly anticipated recessions ever is looming over the economy, and yet consumers — especially millennials — are still splurging on travel, services and entertainment.
Companies that attract discretionary spending on things like vacations, dining and concerts are generally some of the first to suffer when consumers tighten their belts. But right now, such businesses are thriving.
Bonds for American Airlines, cruise line operator Carnival and beauty products retailer Bath & Body Works (formerly L Brands) are among the highest trading bonds in the high yield index currently in terms of dollar price, according to a 9fin screener.
In the loan market, debt issued by LATAM Airlines, horse-racing company ECL Entertainment and wholesale retailer BJ’s are among the highest-priced loans in the secondary.
There are technical elements at play here too (call dates, ratings, time to maturity) but at least some of the price action on these instruments reflects the unexpected resilience of the experience economy, at a time when investors would traditionally expect consumers to be reducing their spending, sources said.
Of course, the economy is not yet in a recession. The unemployment rate is still hovering near historic lows of 3.7%, and this week’s jobs number was surprisingly strong. This is partly because leisure and hospitality companies are continuing to hire amid such strong demand, according to the Bureau of Labor Statistics.
But even when a recession does hit, some investors say discretionary spending in the service industry could remain elevated compared to previous economic downturns.
Stimulus-juiced savings accounts and pent-up demand for experiences coming out of pandemic lockdown are partly to blame. But investors also noted that millennial consumers continue to spend on travel and nightlife in part because they are delaying getting married, buying houses and having kids — compared to previous generations, they’re settling down later in life.
“The idea that people are worried about a recession and curbing their spending is very foreign to everyone ages 22 to 35,” one HY analyst said. “The dynamic of what matters to people in that cohort has changed dramatically over the last 10 years, so I think you're gonna have a lot stronger consumer spending than then you've seen in past times of weaknesses.”
Nights out before lights out
Recent corporate earnings would suggest consumers are not pulling back on spending, at least when it comes to experiences.
In other signs of strong travel demand, occupancy on the Las Vegas strip has returned to pre-pandemic levels, and airline sector earnings were strong with American Airlines even raising guidance this week. Cruise lines are also among this year’s top-performing credits, sources said.
More recent second-quarter data from Bank of America Institute shows that credit card spending on services did moderate somewhat in April. Total credit and debit card spending on services still grew by nearly 1%, but that is down from a more than 9% growth rate earlier in the year.
Still, spending on services is well above pre-pandemic levels. Some observers believe demand for experiences will continue to be driven by millennials, many of whom have received pay increases in recent years and have plenty of savings to continue spending.
“It’s certainly possible that if millennials are starting families later they would have fewer responsibilities that would require them to tighten their belts,” said Michael Anderson, a credit strategist at Citi. “It allows them to be able to continue to spend, to some extent.”
This theory about changing generational attitudes and spending habits is partly a response to some of the confounding trends market participants are noticing among consumers.
Specifically, inflation is pushing prices higher, and yet companies report that price elasticity remains favorable, said Anderson at Citi. In other words, prices keep going up and yet (so far) people appear willing to pay them.
Companies are bracing for the moment when this dynamic reaches some kind of breaking point, but at the same time, they’re finding it extremely hard to pinpoint when that might be.
Packaging company Ball Corp summed up the dilemma well on its Q1 earnings call, when discussing how much it should spend on promotions this year.
Daniel Fisher, the company’s CEO, explained that the price of an average 12-pack of soda has doubled in the past three years to about $8. So would a $1 or $2 promotional discount really move the needle for consumers? Or would they keep buying anyway at these higher prices?
“The end consumer strength or weakness is something that's very difficult to understand right now just given the stimulus packages and higher interest rates and all of those things,” Fisher said. “It's ambiguous and difficult to quantify.”
Retail pullback
But while spending on experiences remains elevated, consumers seem to be pulling back on buying stuff — and the retail segment is starting to suffer.
Consumer credit card spending on retail fell roughly 2% in March compared to a month prior, and was well below January 2020 levels, according to Bank of America Institute’s consumer spending report from April.
“Whether it’s brick and mortar or online, retail has taken a decisive leg down into negative territory,” said Neha Khoda, head of global loan strategy for BofA Global Research. “We see meaningful proof of consumer softening.”
There are some relative bright spots within retail, she added: groceries, restaurants, pet foods and beauty products are holding up slightly better. But overall, it appears that consumers are spending less on physical goods.
Some observers believe this broad softening in retail will express itself in more divergent and complex ways as the economy cools, with consumers making increasingly tough decisions about where to prioritize their spending.
“I would say that consumer wallets and economics are normalizing,” said a portfolio manager. “From here on out, I think it becomes less homogenous, and as an investor, you need to be looking for opportunities that are price inelastic and won't suffer as much as those that are elastic.”
But while these trends in retail are concerning, some investors still feel services and entertainment will remain a strong area in consumer spending for some time to come.
“Yeah, a recession will have an impact,” one buysider said. “But the travel and services sectors might hold up better than they would have in past recessions.”
How well the consumer sector performs overall may just come down to how many millennials decide to settle down, and how many keep the party going late into the night. In other words, how YOLO can you go?
“Long-term, it’s going to bite them in the ass,” said the HY analyst. “But they're having a great time while they're doing it and spending all their money on entertainment, travel, restaurants, and clothes.”
