Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Consumer Spending Is Outpacing Real Income Growth
Transcript
- Lucas: So the latest personal income and outlays report dropped last week, and there's one number in it that I keep coming back to: personal consumption expenditures growing at an annualized rate of five point six percent in the second quarter, while real disposable personal income is only rising at three point nine percent. Luna: That's a gap of nearly two percentage points. So we're spending faster than we're earning, in real terms. Lucas: Exactly. And it's not a one-month blip. This divergence has been widening for about a year now. In mid-twenty-twenty-five, those two lines were basically tracking each other. Now they've drifted apart by about one hundred seventy basis points. Luna: So where's the extra spending money coming from? People aren't just finding it under the mattress. Lucas: Right. There are really two sources, and neither is particularly comforting. The first is a drawdown of pandemic-era savings. The Federal Reserve Bank of San Francisco estimated back in May that households had exhausted about ninety percent of the excess savings accumulated during twenty-twenty and twenty-twenty-one. The remaining buffer is concentrated among higher-income households. Luna: So the subset of people who still have savings are the ones who already have the most. That sounds like a liquidity story that's running out of steam. Lucas: That's exactly right. The second source is credit. Total revolving consumer credit, which is mostly credit card debt, hit one point four trillion dollars in May, according to the Fed's G.19 release. That's up nine percent year-over-year. Luna: And delinquency rates are climbing. The New York Fed's quarterly household debt report showed serious delinquencies on credit cards — ninety days or more past due — at eight point five percent in the first quarter, which is above pre-pandemic levels. Lucas: That's the highest since twenty-twelve, if I'm remembering correctly. So you have a situation where consumers are leaning on credit to sustain spending growth that outpaces income growth, and the early warning signals are already flashing red. Luna: But the macro data still looks okay, right? Real GDP growth was two point one percent annualized in the first quarter, and the Atlanta Fed's GDPNow tracker for Q2 is around two and a half percent. The consumer is still doing the heavy lifting. Lucas: Yeah, the top-line numbers are fine. Consumption contributes about two-thirds of GDP, so as long as consumer spending holds up, the economy looks solid. But the composition of that spending matters. If it's increasingly funded by debt, then you're pulling demand forward. At some point, you have to pay that back, and that means future consumption will take a hit. Luna: It's also worth noting that the personal savings rate dropped to three point seven percent in May, which is down from four point one percent in April and well below the seven percent average of the twenty-tens. Lucas: That's a really important point. The savings rate is now at levels we last saw in twenty-oh-seven, right before the Great Recession. Now, I'm not predicting a repeat of two thousand eight. The household balance sheet is in better shape overall — debt to income ratios are lower. But the trajectory is concerning. Luna: And this has implications for the Federal Reserve, doesn't it? If the consumer is slowing down because they're tapped out, that could be disinflationary. The core PCE price index, which the Fed targets, was at two point six percent year-over-year in May. That's still above the two percent target. Lucas: Right. The Fed is stuck in a difficult position. The fed funds rate is at three point six three percent, and they've held steady since March. If they cut rates and the consumer keeps spending, inflation could re-accelerate. If they hold tight, and the consumer cracks, we could see a sharper slowdown. The bond market is already pricing in about a fifty percent chance of a rate cut at the September meeting. Luna: But the labor market is still adding jobs — a hundred fifty-seven thousand in June, though below expectations. And the unemployment rate fell to four point two percent. So the 'consumer is fine' camp has data on their side. Lucas: They do, but look at the quality of jobs. A lot of the recent gains are in part-time work and lower-wage sectors like leisure and hospitality. Average hourly earnings are up four percent year-over-year, but that's barely keeping pace with inflation. Real wages are essentially flat. Luna: So the narrative of the resilient consumer might be masking a more fragile reality underneath. Lucas: I think that's exactly right. And here's the thing — if spending habits like these persist, it's not just a story about household balance sheets. It has direct implications for corporate earnings, especially in consumer discretionary and retail. Companies that have been relying on volume growth may start to see a squeeze. Luna: We've already seen some retailers like Target and Walmart report cautious guidance, citing 'value-conscious consumers.' That's corporate speak for 'people are pulling back.' Lucas: Exactly. And if the savings buffer is depleted and credit card debt is maxing out, the next leg of spending will have to come from income growth. But that requires a tight labor market driving wage gains above inflation — which we haven't seen consistently. Luna: So what's the key indicator you're watching over the next few months to see which way this breaks? Lucas: I'm watching the personal savings rate and credit card delinquency data like a hawk. If the savings rate drops below three percent, that's a major warning sign. And if ninety-day credit card delinquencies break above nine percent, we're in territory that historically precedes a consumer-led slowdown. Luna: And if walking through the economy with us has made something click — even one data point you'll remember next time you see a retail sales headline — we're really glad. This show stays ad-free thanks to listeners who support it. If that's something you value, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it genuinely helps keep the lights on and lets us keep digging into these questions. No pressure, just putting it out there. Luna: So back to the spending gap — one more thing I want to flag. The ten-year Treasury yield has been creeping up and closed at four point five three percent yesterday, up about twenty basis points in the last week. That could be the bond market sensing that the consumer is going to need higher returns to keep funding this spending, or maybe it's just a reaction to the inflation data. Lucas: I think it's a bit of both. The ten-year breakeven inflation rate is at two point two five percent, which is pretty stable. So the move in nominal yields is mostly real yields rising. That could reflect stronger growth expectations, or it could be a term premium story — investors demanding more compensation for holding long-term debt in an uncertain environment. Either way, it makes borrowing more expensive for everyone, including consumers. Luna: So the higher yield environment indirectly tightens financial conditions, which could further slow consumer spending. Lucas: Exactly. It's a feedback loop. Consumers borrow less, spending slows, incomes don't grow fast enough, and then the cycle feeds on itself. That's why I think the Fed is in a tough spot. They don't want to cut prematurely, but they also don't want to overtighten into a consumer that's already stretching. Luna: Alright, so we'll be watching the July personal income data and the Q2 GDP advance estimate due later this month. Those will give us the next read on whether this gap is still widening. Lucas: Absolutely. And if the consumer does start to buckle, it changes the whole macro picture. For now, it's a slow-motion divergence — worth monitoring, not panicking over. Luna: Good note to end on. Thanks, Lucas. Lucas: Thanks, Luna.