The 3 Drivers of US Consumers Hit a Wall

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The American consumer is giving up. Tapped. Out of cash.

So says Bloomberg in a recent article called โ€œKey engines of US consumer are losing steam all at once.โ€

In short, consumer spending over the past year has been propped up by 3 things: incomes, savings, and debt.

All are now out of runway.

Incomes

For the past year, real incomes had been beating inflation.

This isnโ€™t surprising since itโ€™s how inflation works: The Fed dumps new money into assets, making rich peopleโ€”and Wall Streetโ€”richer.

Then it takes years to slowly dribble down to the suckersโ€”er, workers.

That should, in theory, mean several years of real wage growth as pay catches up to inflation. Thereโ€™s a permanent loss, sure, since theyโ€™re end-of-line. But eventually, in theory, they stop falling further behind.

Unfortunately, that process appears to have been very short post-COVID. Real disposable income went from 5 percent growth in the middle of last year to just 1 percent year-on-year.

Note thatโ€™s before the collapse in job openings last week, which could slash raises to where they fall behind inflation again.

Savings and Debt

During the pandemic, Americans built up over $2 trillion in excess savings, as they stopped taking vacations or going to restaurants. Either because they were worried about their job or because we were living in a police state.

Those $2 trillion came in handy as policies from DC drove up grocery and gas prices. But heโ€™s now used them up.

Bringing us to Bloombergโ€™s reason number 3: debt.

Once the savings were gone, debt was on the table, with private debt skyrocketing from car loans to student loans to credit cards. Hitting $17.5 trillionโ€”a new record.

Thatโ€™s now hitting a wall, with credit card delinquencies up 50 percent year on year.

The Frozen Consumer

Put all three together and the income catchup is over, the consumerโ€™s out of money, and theyโ€™re so deep in debt they canโ€™t fake it anymore.

At which point, as Bloomberg puts it, they โ€œexercise spending restraint.โ€

This spending restraint starts with cars, consumer durables like washing machines, restaurants, and leisure.

Byย Peter St Onge

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