A reader asks:
What does consumer debt do? Despite all this bad news, are people still spending money like drunken sailors?! Where is the canary in the coal mine?
Fair question.
All decade long, people have wondered how the consumer can remain so resilient in the face of constant concerns about high inflation, gas price increases (twice now), tariffs, a slowing labor market, and recession possibilities.
And yet…
Look at retail sales continuing to rise:
transcript He shared some comments from recent earnings calls where executives all agreed that the consumer remains in good shape from a spending perspective:
Airline traffic also remains strong:
Households continue on holiday. Restaurants are full. People are buying things.
How?
Why have all the predictions of a consumer slowdown this decade proven wrong to this point?1
There are several reasons.
Debt has definitely increased in the 2020s:
Consumer debt is much higher than in pre-pandemic days; It increased from 14.2 trillion dollars at the end of 2019 to 18.8 trillion dollars at the end of 2025.2
But to avoid denominator blindness, you have to look at liabilities in relation to assets.
Assets are dwarfed by liabilities, and it’s not even close. Additionally, growth in these assets has outpaced growth in liabilities by roughly two to one over the last six-plus years.
While it has always been thought that the rich are getting richer, the bottom 90% actually experienced relatively larger wealth gains in the 2020s:
This is surprising, isn’t it?
Certainly, top 10% they still control much more wealth than the bottom 90%. But collectively everyone got richer.
It’s hard to overstate how much wealth was created in the stock and housing markets in the 2020s.
Home equity has almost doubled since the end of 2019:
There are also approximately $8 trillion in money market assets:
The 2020s have seen an explosion of wealth.
If you want to know why consumers are spending like drunken sailors, despite the events and changes of the last 6 years, this is the simplest explanation.
Inflation hurts, but wages are high and assets are too high.
This doesn’t mean everything is perfect. They never are. The rising tide lifted most, but not all, of the ships.
Defaults on credit cards, student loans, and auto loans are on the rise:
It is worth paying attention to this.
The good news is that the number of households experiencing foreclosure and bankruptcy remains low by historical standards:
Can this continue?
Americans love to spend. We are good at this.
I think a lot depends on how the financial markets perform and whether the unemployment rate will rise meaningfully.
As long as households feel wealthy and have jobs, it is hard to see spending levels slowing down.
This could certainly change if markets experience a prolonged downturn and/or people start losing their jobs.
I addressed this question in the most recent episode of Compound Ask:
We also touched on questions like why markets move so much in the short term, how well your 60/40 portfolio protects against bear markets, how advisors should think about private investments, and some lessons learned in asset management.
Further Reading:
Longest Economic Boom Ever?
1Remember when the biggest concern was depleting pandemic savings? You don’t hear that anymore.
2Mortgage debt is still by far the largest debt (70% of the total). Auto loans (9%), student loans (9%) and credit card debt (7%) are other large categories.
