American Consumer Economy: Challenges and Future Outlook

The American consumer faces a daunting future due to rising costs, stagnant wages, and overwhelming debt.

### The Dismal Science of American Consumerism: Inflation, Debt, and Economic Challenges
* 💰 Philosopher Thomas Carlyle dubbed economics the "**dismal science**," yet the American economy heavily relies on consumer spending, which constitutes **nearly 70% of GDP**.
* 🛍 While traditional indicators show that Americans are still spending, underlying issues reveal a more complex situation as consumers face **rising costs and diminishing savings**.
* 📉 The pandemic initially boosted bank accounts, but as restrictions eased, consumers engaged in **"revenge spending,"** leading to a **depletion of pandemic savings** and **increased credit challenges**.
* 📊 Inflation reached a **staggering 9.1%** in 2022, causing significant price hikes across essential goods and services, which has forced consumers to make **tough spending choices**.
* 💳 With over **$17 trillion in visible debt** and the rise of "**phantom debt**" through buy now, pay later schemes, many Americans are struggling to keep up with their financial obligations.
* 📉 Wage growth has stagnated, failing to keep pace with living costs, leading to a situation where even households earning **up to $250,000** are **living paycheck to paycheck**.
* 🔍 Despite the grim outlook, the Federal Reserve's recent interest rate cuts may offer some relief, with hopes of a **"soft landing" for the economy**, although challenges remain ahead.

Philosopher Thomas Carlyle called the study of economics the dismal science, but that was before they invented shopping sprees. In fact, a great deal of the entire global economy relies on Americans emptying their wallets. So you can't understand the American economy without understanding the consumer. I mean, it makes up close to 70% of GDP. It could be clothes, it could be food, groceries, restaurant meals, airplane tickets. It's really any kind of good or service that Americans buy. If you look at some of the traditional indicators, the American consumer is still holding up, right? People are still spending at a healthy pace, but if you look under the surface, things aren't looking as great anymore. I just honestly don't know how people are making it. This is ridiculous. It's the current economy we're living in. The prices of goods, the prices of food, they're never going down again.

Is the American consumer tapped out? It's really complicated. To understand where we are today, we need to go back to what feels like a hundred years ago. There was, you know, March 2020, the global economy sort of shut down. Governments responded. They pumped a bunch of money into the economy. Nobody was traveling. People were barely eating out. You know, at the same time, a lot of people who were able to work from home, you know, they didn't lose their jobs. Sort of they continued to earn money, but were just spending less. People's bank accounts really got bigger and bigger. And once COVID-19 restrictions started to ease, the world returned to normal, consumers, you know, went on a splurge. They started revenge spending. People wanted to travel. People were buying luxury goods. People were going out to eat expensive meals. But this too shall pass. And the All-American shopping spree is no exception.

The pandemic savings are largely gone. So that cushion that consumers had for a long time is no longer there. Credit challenges have intensified. Our borrower is struggling with high inflation. Why the concerns about inflation? Why did we have this inflation? Inflation has for sure been the biggest economic story of the past few years. By 2022, inflation hit 9.1%, a high not seen since 1981. If you have to go take a trip, that flight is more expensive. The hotel prices are up, the grocery bill is expensive, your car payments are expensive, your housing payments are expensive. So inflation has really taken its toll. And even though inflation has started receding recently, that doesn't mean prices are falling. That only means prices are rising less fast. So for consumers, that means that they're having to make choices. Businesses are now reacting to some of the tough choices consumers have to make. If McDonald's starts to see a sales slowdown,

that's an indicator that people are saying, You know what? I'm gonna make lunch at home today. As a way to draw back customers, they've started to offer value deals. Americans are stretched thin. And if they can eat out, they're looking for a cheaper option. McDonald's and Starbucks are talking about a more price-sensitive customer. That is the kind of thing that starts to become, maybe, a canary in the coal mine. Speaking of canaries in coal mines, let's talk about debt. Right now, all told, Americans are holding onto more than $17 trillion of debt, and we're finally starting to see Americans fall behind on mortgages, personal loans, auto loans, student debt, and credit card debt. And of course, with interest rates high, people are paying a lot on those credit card balances. So if you're sort of buried under credit card debt, that is gonna impact your ability to spend out in the economy.

But wait, there's more, more debt that is. You know how the universe has dark matter? Well, the American economy has kind of its own version of that called phantom debt. So there's $17.8 trillion of debt that we can see. What some experts are even more scared about is the debt that we can't see. This phantom debt lurking in the economy that could be hiding consumer distress. The concept of phantom debt is centered around the buy now, pay later services that have been popping up on all of our online purchases lately. Buy now, pay later, is sort of part of the FinTech world. It's sort of a new spin on an old idea, if you think about layaway, you can buy this product now. Instead of paying the a hundred dollars now, you can pay in four installments. Buy now, pay later services have become ubiquitous, and we've started seeing people use buy now, pay later options for groceries.

to get buy and put food on the table. One of the challenges with buy now, pay later is that there's a bit of an opaqueness to it. It's a total black box. They don't report to credit bureaus in the way that, you know, credit cards have to. It's an unknown, which, you know, obviously economists don't like. Actually, let me just check my notes really quick. I think I had some stats here. So just to pull together some numbers for you, some estimate that buy now, pay later services backstop about 75 billion in online purchases alone. Others project that the buy now, pay later market could reach 700 billion globally by 2028. Increasingly relying on credit and falling into debt is an indicator that Americans aren't making enough money, which makes sense, considering wage growth has been slowing down for most of the past two years, barely keeping up with inflation.

Longer-term wages just have not kept up with the cost of living. There's this new study from JP Morgan that shows that for lower-income consumers, it's becoming harder and harder to pay their bills. We know that these people, when they have a medical problem, can send them into bankruptcy. The pain is not reserved exclusively for Americans in the lowest rung of the economy either. While Americans who own homes or have invested in stocks have helped sustain consumer spending, reports have also shown that an alarming number of households with incomes of up to $250,000 a year are now living paycheck to paycheck. The idea in the US was always that if you worked hard, went to college, you were gonna do better than your parents, right? That was sort of the story of the post-World War II era with the baby boomers. And I think that the lifestyle that people think that they're entitled to has gotten more expensive. And I think that that does create

a lot of pessimism about the economy. Rising costs, lower wage growth, and unsustainable debt, both known and phantom, add up to quite the triple threat for American consumers of every class. Amid all that doom and gloom, you may be wondering if there's a silver lining. There is one. The Federal Reserve started cutting interest rates in September after leaving them at a two-decade high for more than a year. There is hope that lower interest rates will be good for regular people. So far, a lot of experts think that the Federal Reserve will be able to nail a soft landing, but there is still some pain, and there will be more pain to come.

Is the American Consumer Done Spending?

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The Impact of Consumer Spending on the American Economy

The American consumer plays a crucial role in the economy, making up close to 70% of GDP.

While spending has been healthy, underlying issues suggest that the economic situation is not as stable as it seems.

The pandemic's impact, with government stimulus and reduced spending, led to a surge in consumer spending once restrictions eased, but this shopping spree may not last.

The Impact of Inflation and Rising Debt on Consumers

Pandemic savings have diminished, leading to increased credit challenges for borrowers struggling with high inflation.

1% in 2022, driving up costs for essentials like flights, hotels, groceries, and housing.

As a result, consumers are making tough choices, leading businesses like McDonald's to offer value deals and respond to a more price-sensitive customer base.

The Impact of Phantom Debt in the American Economy

8 trillion, is a growing concern for experts, as it represents the unseen consumer distress caused by buy now, pay later services.

These services have become ubiquitous, even being used for essential purchases like groceries, but their opaqueness and lack of reporting to credit bureaus create uncertainty.

The buy now, pay later market is projected to reach $700 billion globally by 2028, highlighting the increasing reliance on credit and the stagnation of wage growth in the U.

The Struggle of American Consumers with Rising Costs

Longer-term wages have not kept up with the cost of living, making it harder for lower-income consumers to pay their bills.

An alarming number of households with incomes up to $250,000 a year are now living paycheck to paycheck.

The Federal Reserve's recent interest rate cuts offer hope for regular people, but there is still pain and uncertainty ahead.