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The U.S. consumer has carried economic growth – and remained far more resilient than many headline economists expected last year.

Juiced up on excess savings, higher wages, a tight labor market, and higher home prices have bolstered spending.

And while I agree it’s impressive, I am worried many economists are now growing complacent.

Or – rather – they may be falling for the recency bias.

·         Recency bias involves overemphasizing recent experiences or the latest information when estimating future events. This tendency misleads us into believing that recent events can accurately predict how the future will unfold. Meaning when things have been good recently, we expect them to continue. And vice versa.

So, instead of ending up in the graveyard of those who fall for this trap, let’s take a closer look at some of the trends.

You may be thinking, “Oh, how exciting…”

Normally I would agree – but this time there are some issues worth looking at.

Put simply, there are four key drivers when studying spending – which are:

1.      Real Disposable Income (DPI) – aka inflation-adjusted income that’s left over after taxes and doesn’t include debt servicing payments (what comes in).

2.      Real Personal Consumption Expenditures (PCE) – aka inflation-adjusted personal spending (what goes out).

3.      Personal Savings Rate – aka the percentage amount of disposable income that’s saved (the amount of paycheck left over after spending).

4.      Revolving Debt – aka the credit line that remains available even as you pay down the balance (credit cards being the most popular form). Note that all debt is important for consumer spending, but I will just focus on credit card debt here.

Now, all four of these generally influence one another in some capacity.

For example: you can only do two things with the same dollar – save or dissave (consume).

So, if an individual wants to spend more from each paycheck, the savings rate will decline, and consumption will rise.

Or - if their disposable income declines but want to keep spending as normal - they can use debt instead.

See how these all work like gears – pulling and pushing at each other?

Now, let’s take a look at these four trends starting in 2020.

For simplicity, I am indexing the data at 100 for January 1, 2020, so that we can gauge how these four data points have changed in the last four years.

Meaning as of that date right before the pandemic began, all the data points start at 100.

Thus, according to the latest St. Louis Federal Reserve data, we can see that between January 1, 2020, and January 1, 2024 (the last four years):

·         Real disposable income (blue line) rose 6.9%

·         Real personal consumption expenditures (red line) rose 10.5%

·         Credit Card and revolving debt (green line) rose 23%.

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·         Meanwhile, the personal savings rate (orange line) has declined -49% (aka the personal savings rate is now just 3.7% vs 7.7% in Jan-1-2020).

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Now - if you’re like me – these data points may have raised an eyebrow.

·         “Real spending growth – the red line - has outpaced real income – the blue line - by that much?”

·         “Credit card debt has ballooned over 23%?”

·         “The personal savings rate has collapsed by half compared to pre-pandemic?”

It appears the plot thickens, right?

But this shouldn’t come as a surprise.

To give you some context: after the pandemic began – most notably in the early years between 2020 and 2021 - households saw a surge in disposable income and savings (courtesy of government stimulus programs) and sinking spending (amid lockdowns).

This allowed households to pay down debt with the excess money (as we saw credit card debt plunge).

But since late 2021, this pattern quickly began reverting.

Since then, the data shows us that the consumer is spending faster than income growth, saving less, and using much more debt.

In fact, if we step back and look at total household debt1 (auto loans, mortgage, student debt, credit card, etc) it’s risen over 17.3% between Q1-2020 and Q3-2023 (the latest data published).

A graph of a graph showing the amount of debt

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Now, please keep in mind that credit is demand.

For instance, when an entity – either a business or a person or government – borrows, they’re spending it now on something and plans to repay later.

Imagine if mortgages, auto loans, and student loans weren’t easily accessible. Households would then be forced to save much more of their income over the years to be able to afford these big-ticket expenses.

·         This is a big reason credit is so lax in the U.S.

As a consumption-driven economy (making up roughly
~70% of our GDP2) – cheap debt can subsidize further spending above what wages justify.

If not, sales would likely take a hit (as groups are forced to save more to buy), prices would sink from the lack of demand, and growth would slow.

The point here is, that if wage growth is lacking, and credit is cheap, borrowing can subsidize spending (or rather, credit can cover the gap between lower incomes and higher spending).

Another option is reducing savings – or saving less to spend more.

This is exactly what we’ve seen since 2020-2021 (according to the data I showed above).

And here’s why my skepticism arises going forward. . .

The Issues Ahead: The Consumer on Borrowed Time?

It’s important to remember the wise teachings of the late economist – Hyman Minsky.

Private debt can’t rise forever.

Eventually, the capacity to borrow will be hit and debtors must divert more and more disposable income to repay debt.

Meanwhile, the excess savings can’t last forever either. Eventually, it will exhaust and force consumers to begin diverting more income towards rebuilding their savings (which implies spending less). Or at the very least, they won’t have that excess to pull from to spend.

If savings deplete, credit cards max out, inflation continues above trend, and real wages remain anemic – that may become a perfect storm for consumers.

Mentioning wages: while it’s true that as inflation growth has declined over the last year, it’s boosting “real” incomes (cheaper prices mean more wage power).

But if we look at the bigger picture, real wages have only grown 1.1% since January 1, 2020 (again indexed at 100).

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In conclusion, I remain skeptical about the consumer in the coming year.

I may be wrong – which I am fine with - but I just don’t believe the math adds up (as detailed above).

Making matters worse, that “real” disposable income only factors in after-tax income. It doesn’t factor in debt servicing payments.

And the more debt there is, the more debt servicing payments there are. . .

Time will tell, but this is just some food for thought.

The main takeaways:

1.      Beware of recency bias.

2.      Look closer under the hood of the U.S. consumer.

As always, the black swans are lurking.





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