American Consumers Are Still Struggling And That’s Bad News For The Market

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Last Updated on: 28th December 2020, 11:51 pm

sears closing

From a technical standpoint, the American economy is looking good. The economy has been adding on average about 200,000 new jobs a month and unemployment is down to 5.5%. The stock market is also booming and the housing market is on its way to matching prices from before the housing bubble crashed.

Unfortunately, for the average American consumer, it sure doesn't feel like a recovery. When you look behind the main indicators and start digging into consumer data, you’ll see a few troubling patterns. The average consumer is struggling and buried under debt, and that is nothing but bad news for companies, the stock market, and the entire economy.

Consumers aren't spending and have no money to spend

Even though the economy is technically better than it was a year ago, Americans aren't acting that way. Consumer spending has been lower throughout 2015 than it was during 2014 and hit a 3-year low in March. Since consumers are a key driving force behind the economy, economic growth is starting to fall apart too. The Atlanta Fed reported that GDP growth was 0% in the first quarter, a sign that we’re dangerously close to falling into another recession.

falling GDP forecast

Now, the Fed is brushing this off as an anomaly because of an unusually bad winter with heavy snow. We’ll see. The University of Michigan’s consumer sentiment rating, a measurement of consumer confidence, is also falling. This measurement fell from 95.4 in February down to 91.2 in March, a drop of nearly 5%. Cold weather wouldn’t explain a loss of confidence.

Another explanation is that consumers just don’t have any money to spend. While wages saw some growth over 2014, they are starting to flat-line again, especially for non-supervisory workers who are 80% of the workforce. If consumers don’t have any money to spend, how is the economy supposed to grow?

falling wages

Buried under debt and the wrong kind of debt

Another problem with American consumers is that they’re buried under debt. Consumer borrowing set a new record in February at $3.34 trillion. With all this debt to pay off, Americans are putting more and more of their paychecks towards debt payments leaving them with less money for actual spending.

What’s even more concerning is the type of debt Americans are taking out. The main drivers to American debt are student loans and auto loans. Credit card debt actually declined in February. While less credit card debt might seem like a good thing, it’s actually another sign of consumer confidence. Americans don’t feel great about their future prospects so they aren't willing to make regular purchases on credit. This is bad news for retailers. At the same time, people are piling on student loan debt as they are pessimistic about their career prospects and are hoping more education could be the way out.

Another important factor is that student loans and auto loans are both partially subsidized and guaranteed by the government. Since the government seems to have no problem just printing money and taking on all lenders, that’s not too much of a surprise. It’s not their money to lose, just the taxpayers’.

In the private sector, it’s a different story. Even though consumer debt is hitting new records, private lenders are barely making any new loans at all. Bank lending fell by $18.8 billion last month which was the biggest drop since January 2011. Private lenders aren't feeling too confident about the future of American consumers either and aren't willing to risk any money on them.

No consumer demand here or abroad

American companies are simply running out of people to sell too. American consumers don’t have any money and don’t look like they can support a recovery. Private lenders aren't willing to lend and add more money to the economy so there won’t be any growth from there. Things are even looking bad abroad as the strong American dollar is crushing exports. As a result, there’s just no more demand and without demand, another recession is likely.

Somehow, despite these problems the American recovery keeps plugging along. But cracks are starting to show. March was the worst month for job creation in 15 months. While the stock market is holding steady, it wouldn't take much to prompt a collapse. After all, companies have a lot of debt and not many customers. A little push in the wrong direction, like a rise in interest rates, could send it all crashing down. Is now the time of investors to get out? Consumers and lenders seem to think so.

The American economy rises and falls based on its consumers. Unless consumer spending turns around soon, things are going to fall apart. Let’s hope for no more snow.

David Robles
David Robles

David has a bachelor in Economics and an extensive financial background. He is CFP® professional which means that he is an expert in investment and retirement planning. David enjoys covering current geopolitical world events and topics that relate to the U.S. economy.

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