Citi analysts believe the U.S. consumer is strong, but they noted that cracks are emerging.
"The U.S. consumer has kept economic growth resilient over the last year in the face of high inflation and tightening monetary policy," the analysts wrote, adding that consumers overall are "still in a strong position" with labor markets tight, excess savings sizable, and debt levels and delinquencies remaining well contained.
However, they stated that the resilient aggregate picture "hides key vulnerabilities within the household sector."
"The bottom 40% of households, for example, account for around 10% of income, but over 20% of consumption and tend to have high debt burdens," added the analysts. "These dynamics make low-income consumers more at risk of defaults and a pullback in spending as the economy weakens and interest rates remain elevated."
The analysts believe signs of strain in this group are starting to emerge, with climbing credit card debt and subprime delinquencies.
"Were weakness in the low-income consumer to persist, broaden, and worsen, it would have material implications for economic growth and financial stability," they concluded.