The 3 Drivers of US Consumers Hit a Wall

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Commentary

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

So says Bloomberg in a recent article called “Key engines of US consumer are losing steam all at once.”

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

All are now out of runway.

Incomes

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

This isn’t surprising since it’s how inflation works: The Fed dumps new money into assets, making rich people—and Wall Street—richer.

Then it takes years to slowly dribble down to the suckers—er, workers.

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

Unfortunately, that process appears to have been very short post-COVID-19. Real disposable income went from 5 percent growth in the middle of last year to just 1 percent year over year.

Note that’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 COVID-19 pandemic, Americans built up more than $2 trillion in excess savings, as they stopped taking vacations or going to restaurants either because they were worried about their jobs or because we were living in a police state.

Those $2 trillion came in handy as policies from Washington drove up grocery and gas prices. But the consumer has now used those savings up.

Bringing us to Bloomberg’s reason No. 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. It hit $17.5 trillion—a new record.

That’s now hitting a wall, with credit card delinquencies up by 50 percent year over year.

The Frozen Consumer

Put all three together and the income catchup is over, consumers are out of money, and they’re so deep in debt that they can’t fake it anymore.

At which point, as Bloomberg puts it, they “exercise spending restraint.”

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

A recent survey found that nearly 80 percent of Americans now say McDonald’s is a luxury item for their household budget. So we can only imagine what a Disney vacation is.

Well, we’ll be able to see in Disney’s next earnings report.

Note that restaurants and leisure are among the biggest employers of blue-collar Americans, summing to nearly 16 million jobs. Which is five times the IT jobs in the United States—so much for “learn to code.”

In fact, that’s almost 1 1/2 times manufacturing jobs, which are presumably next in line with the consumer dropping out of cars and washing machines.

Meanwhile, even the government numbers are now saying the economy is nose-diving. Consider that nine months ago, we were zooming along at 4.9 percent GDP growth. Now the Bureau of Economic Analysis (BEA) is saying we’re at 1.3 percent, with most or all of that going to illegal migrants and government workers.

That’s a heck of a move for nine months, raising questions about whether we’re already in recession—keep in mind the BEA typically doesn’t announce recessions until at least six months after the fact. In the 2008 crisis, they didn’t announce the recession until a full year after it had begun.

Conclusion

Since COVID-19, the economy has been crushed and then papered over with $6 trillion of freshly printed dollars and $8 trillion in deficit spending.

Even that artificial boost is now apparently succumbing to reality.

This leaves two possibilities: ramp up the spending—laying a fourth mortgage on future generations to buy the next couple of elections—or, more likely, Washington watches the train crash slackjawed, whining that nobody could have possibly seen it coming.

Originally published on the author’s Substack, reposted from the Brownstone Institute

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.