We are all hearing about news of inflation, job insecurity, high home prices, high interest rates, so one might think that people would respond by hunkering down, spending less, dining in more, cutting costs wherever possible.
However, as I routinely walk through Bridgeport Village and immediately notice how packed the parking lots are, I see people spending gobs of money on $18 margaritas, $8 scoops of ice cream, expensive coffee, clothing, furniture, eyeglasses, the whole spectrum of consumer items that are luxuries, not necessities.
Full disclosure: I am in that category of enjoying those margaritas, sushi dinners, etc., so I’m not trying to be preachy, but it’s kind of a head-scratcher that the consumerism I am witnessing does not seem to reflect the financial realities I read about on a daily basis.
I’ve always found it shocking that nearly 70% of U.S. GDP is derived from consumer spending. One might think that it might be dropping with the current economic conditions, but that is simply not happening.
I was even more surprised to read a report from Reuters (Aug 29) saying that US consumer spending had increased by the most in four months in July, despite all the negative news. The article said that consumer spending increased by 0.5% in July, while the inflation rate rose to nearly 3% from last year at this time.
This spending is not from increased wealth of Americans, it’s from increased consumer debt, which has reached a record high of over $18 trillion. Most (70%) is mortgage debt, which is understandable and typical, but the real eye-opener is US consumer credit card debt reaching an all-time high of $1.21 trillion.
This phenomenon of high consumer debt is nothing new, but the widening gap between lower and higher income households is noteworthy. The wealthy are making gains on their incomes (3.2%), and the non-wealthy are seeing a decline (1.3%). The wealthy wage earners are keeping up with inflation as lower income earners are falling further behind.
It is interesting to compare YTD spending with the stock market over the same period. In April and May, when the stock market tanked, consumer spending mirrored the drop, but as the market recovered in June and July, consumer spending ticked right back up for the wealthy, but less so for the lower income earners, who often do not share in the rising stock markets, as they generally have less invested in it.
As American’s face a high degree of uncertainty in the coming months, maybe years, it will be interesting to see how consumers respond. It seems that consumer spending is keeping our economy afloat on the one hand, but will the increased household debt crimp future growth on the other?
I saw a meme the other day that said, “Just Let Me Shop and Nobody Gets Hurt!” Perhaps our economy is counting on that. In the meantime, I might need to go grab an $18 margarita!
