The Consumer Is Tapped


“If you think small, your world will be small.  If you think big, your world will be big.”

  • Paulo Coelho


The retail sales figure for May came in this morning (Tuesday) and it was a disappointing number. Coming in at +0.1% was less than the +0.3% which economists had expected. In April they ticked down -0.2% according to the revised data from the Commerce Department. Remember, retail sales make up around 70% of the Gross Domestic Product for the United States.

For the past year, real incomes had been beating inflation. This isn’t surprising since this is 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 workers.

That, in theory, should mean several years of real wage growth as pay catches up to inflation. There’s a permanent loss for sure since they are at the end of the line, but in theory, they eventually stop falling behind. This is true as incomes have been exceeding inflation in the recent past. Unfortunately, that process appears to have been very short-lived post COVID. Real disposable income went from 5% growth in the middle of last year to just 1% year over year. Total wages since the pandemic have fallen far behind inflation.

Note: that’s before the collapse in job openings last week, which could slash raises to where they fall behind inflation again.

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 catching COVID or losing their jobs, thus losing their income. When the pandemic ended, that $2 trillion in excess savings came in handy due to the rise in inflation or people were just going out and engaging in revenge spending after being isolated for months on end. Now that excess savings have been spent.

Another factor in the demise of the consumer is the huge buildup in debt. Once their savings were gone, debt was the next well to draw from. Private debt is skyrocketing from car loans to student loans having to now be repaid to credit cards. Car loan balances and credit card balances are at an all time high with the average credit card interest rates on unpaid balances now at +21%.

Put all these factors together and the party is now over, the consumer is out of money, and they are so deeply in debt they can’t fake it anymore.

Now we are starting to see the consumer exercising “spending restraint”. This spending restraint is starting with cars, consumer durables like washing machines, restaurants, and leisure. A recent survey found that nearly 80% of Americans now say McDonald’s is a luxury item in their household budget.

Note that restaurants and leisure are among the biggest employers of blue-collar Americans, counting for 16 million jobs which is five times the Information Technology jobs in America.

Again, this is just one of the signs of a slowing economy in America. As I have stated in prior letters, almost all of the economic trends are pointing down. 

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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

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