The American Consumer Is More Fragile Than People Realize

Sep. 22, 2019 11:25 PM ETAMZN, EEM, GLD, SPY121 Comments179 Likes


  • Statistics are like mirrors; permabulls and permabears can see whatever they want to see if they go digging for it. Be careful of getting trapped in a thought bubble.
  • The American consumer holds up 2/3rds of the economy but is weakening.
  • A few logical and data fallacies to watch out for.

If you tune into financial media, I guarantee that within a half hour you'll hear someone say that the American consumer is strong. So what if construction spending has gone negative, or manufacturing is down? The consumer is "stronger than ever".

Whether the consumer is strong or not is something we really need to get right, because consumer spending accounts for about 2/3rds of GDP. To say the consumer is strong or weak, we need to be able to defend it. If we are wrong, we need to have a way to realize we are wrong.

The problem is that numbers can be misleading if you only look at the surface. And there are various sources that cherry pick data points to fit their narratives. A devoted bear finds ways to interpret everything as depressingly as possible. A devoted bull finds ways to justify ever-higher valuations and momentum.

This article covers a few common logical traps and then digs into some facts on why I'm concerned about the U.S. consumer.

Trap 1) Denominator Blindness

Be careful when you see headlines like,

"The U.S. Now Has More Household Debt Than Before the Global Financial Crisis!"

On one hand, that's not factually wrong. Total U.S. household debt is nominally higher:

Household DebtChart Source: St. Louis Fed

However, we've had 12 years of inflation during this period, we have a higher population, and our GDP has grown. So, household debt as a percentage of GDP (which takes into account population, inflation, productivity, etc) is lower now than it was during its peak. It was at about 100% and now it's down to about 76%. Still high, but not at a record:

Household Debt to GDPChart Source: St. Louis Fed

The takeaway here is, whenever you see a figure presented to you, ask what an appropriate denominator is and look it up if you need to. Don't fall for headlines on their own, bullish or bearish.

If anything, I'm more concerned about corporate debt than household debt at the moment, although both are potential minefields at these levels.

Trap 2) Median vs Mean

Suppose I tell you there are ten people in a room and the average net worth in there is $10 billion. Naturally, you would imagine a room full of billionaires.

If you open the door and find 9 regular people and Jeff Bezos, you've been misled, even though the number was correct. If nine people in the room each have a $100,000 net worth and one guy has $100 billion, the mean is indeed just over $10 billion. The median is $100,000. The median gives you a much better idea of who, for the most part, is actually in that room.

If you hear about average/mean statistics, always wonder about the median. If you read about a metric, always wonder about other variants of the metric that might make it look better or worse.

Trap 3) Partisan Subjectivity

According to a Quinnipiac polling, your political party plays an outsized role in your perception of the economy.

Partisan NumbersChart Source: FiveThirtyEight

Based on this ongoing set of polls, 88% of Republicans think the economy is good or excellent, while only 39% of Democrats do. That's a massive 49% point divide.

If you're an investor, you can't let politics cloud your judgment. If you're a Democrat and the economy is good under a Republican president, you need to stick with the facts to make money. Similarly, if you're a Republican and the economy is bad under a Republican president, it's important to realize it and avoid getting your portfolio blindsided.

Better yet, I find it best to avoid qualitative assessments when possible, because they're not that helpful. An economy is not "good" or "bad", in other words. It is growing by X rate, has strengths A, B, and C, and has problems D, E, and F. The overall net result appears to be Y, and we need to pay attention to Z.

The U.S. economy is growing at a faster rate than Europe and Japan, but slowing. We have arguably the world's strongest technology sector, and one of the most diversified economies including natural resources. Unemployment is low, and labor participation is mixed. Our construction and manufacturing sectors are entering a contraction based on year-over-year rate of change data, but consumer spending remains in a solid trend. Credit card default rates remain historically low. Corporate debt is historically high relative to GDP and rising, federal debt is historically high relative to GDP and rising, and household debt is mixed. U.S. federal deficits are currently unusually large as a percentage of GDP compared to our historical past and other countries today, especially for a non-recession period, and we have a structural trade deficit. The net result is mixed, and we need to pay particular attention to unemployment rates, consumer credit, and dollar strength.

For better or worse, most of the issues in an economy at any given time are built up from years or decades and are more structural in nature, outside of the scope of any specific party or leader. It's a giant ship that turns slowly.

Trap 4) Watching What Feels Good

All too often, people just keep watching or reading the same things. The things that support whatever view they already have.

You're bullish. You watch CNBC regularly, you focus on the benefits of indexing, buying the dips, dollar-cost averaging, remaining diversified, have already calculated your early retirement date based on 10% forward stock return estimates, and you love looking at backtests showing that if you only invested in your latte money into Amazon (AMZN) in 1998, you could have retired ten years ago.

You're bearish. You read Zero Hedge everyday, have 83 videos in your Youtube history about why gold (GLD) is going to $10,000 (but not the actual GLD ETF because the government is going to confiscate it or you'll otherwise find its vaults empty), the financial system is going to collapse, you'll be trading silver for food, and everyone you follow on Twitter posts nothing but scary charts.

These descriptions are for humor but you get the idea. It's a good practice to develop a habit of purposely seeking out opposing views rather than constantly reinforcing what you already believe.

If I'm bullish on certain emerging markets (EEM), I try to seek out the absolute most bearish thought leaders against emerging markets. I want to see the most rigorous, frightening argument against my thesis, and see how my thesis holds up and whether it accounts for what they're saying. Similarly, if I'm bearish on U.S. equities (SPY), I want to see the most well-organized argument as to why I shouldn't be, and why the S&P 500 is going to 5,000 in the next decade, or whatever the number may be.

I pay attention to some of the most brutally negative bears, and the bulls with the rosiest of glasses, because I want information from all angles.

Keep an Eye on the Consumer

At the moment, the more cyclical parts of the economy like construction and industrial production are entering contractions.

This chart, for example, shows the year-over-year percent change in construction spending (blue area) and industrial production (red area):

Cyclical Downturn

Chart Source: St. Louis Fed

However, payrolls still remain in a year-over-year growth trend:

Payroll Chart Chart Source: St. Louis Fed

Consumer spending and GDP are so correlated that they're basically the same metric. Here are their year-over-year percent changes:

Consumer Spending and GDP Chart Source: St. Louis Fed

If anything, that chart above shows why, "the consumer is strong" is a vapid statement. By the time the consumer is "not strong", a recession started 3 months ago and the market peaked six months ago. Cyclical things show weakness first, and if it gets bad enough, it can lead to job losses, and then weak consumer spending.

So, it's helpful to watch unemployment, which does give us some advance notice. This chart shows the historical unemployment rate, and I put the Wilshire total U.S. stock market index on there for good measure:

Unemployment and WilshireChart Source: St. Louis Fed

Unemployment picks up shortly before recessions. Markets usually peak before recessions. If you want to see the trend more clearly, look at the year-over-year change of the unemployment rate:

Unemployment Year over Year Chart Source: St. Louis Fed

When the blue line goes over the black axis, it's certainly a good time to review your recession plan and make sure your portfolio has the appropriate risk structure for your unique situation.

With all that said, here are a few things I'm concerned about regarding the American consumer:

Home Ownership

Remember the chart way above that showed that household debt as a percentage of GDP is lower than it was during the subprime mortgage crisis? This lower debt is mainly just because we've deflated the housing bubble in several areas, but there is bad debt elsewhere.

Imagine another thought experiment.

There are ten people, all renters, and they each have $100,000 in assets (cash/stocks/bonds) and $20,000 in debt. So, total net worth is $80,000 per person and total debt is $20,000 per person.

There are ten other people, all homeowners. Each one has a $300,000 home with a $200,000 mortgage. They also have $100,000 in cash/stocks/bonds and $20,000 in other debt. So, total net worth is $180,000 per person and total debt is $120,000 per person.

The second group is the more indebted group, but also the richer group. Debt alone doesn't tell us much about balance sheet health. We need to see debt in context.

Here is the historical rate of U.S. home ownership:

Home Ownership RateChart Source: St. Louis Fed

One of the reasons that the household debt rate is down is simply because the home ownership rate dropped from over 69% to about 64%, after bottoming at 63%. In some ways this is a good thing because many of those people who owned homes couldn't afford to, so the system was cleaned up a bit in that regard.

However, this can give people looking at headline numbers a sense of complacency. Household debt to GDP is down, so we're fine, they might think. And yes, some housing leverage has been removed due to normalized home ownership rates, but the next source of debt...

High Consumer Credit

When we factor mortgage debt out of the equation and just look at consumer credit as a percentage of GDP, we see a much weaker picture:

Consumer Credit

Chart Source: St. Louis Fed

Consumer credit to GDP was 15.5% a couple decades ago, about 17.5% in the months leading up to the previous recession, and now it's at a record level at over 19%.

This is the type of debt we don't want to see too much of. It consists of loans that aren't tied to appreciating assets, essentially. It comes out to approximately $20,000 per working-age person, and is spread out among the population rather than concentrated at the top. This, in my opinion, is the most important debt ratio to monitor.

The result here is that U.S. household debt is near (but not at) all-time records as a percentage of GDP, but the specific mix of debt is worse, with consumer credit at all-time record levels as a percentage of GDP.

Weak/Mixed Labor Participation

The unemployment rate is near all-time lows, which makes for an easy metric to cite. Despite being useful, it's incomplete. It measures people who don't have a job, but want a job and are looking for one. It doesn't include people who need one but have given up looking, people that have a job but are under-employed relative to their education level and desired profession, or people that simply choose not to work.

I like to look at labor participation. In addition to giving useful economic data, it shows shifting demographic trends that can give us clues.

Labor participation is okay, but down from all-time highs:

Labor ParticipationChart Source: St. Louis Fed

You might naturally assume that this is due to an aging population, with a larger share of non-working elders. The opposite is actually true. Elders are working at higher rates than ever, while young people are working less:

Labor ChartChart Source: BLS

40.0% of people over 55 are working today, roughly flat from 39.4% ten years ago, and up significantly from 31.3% twenty years ago. The 65-74 group and the 75+ group are working way more for both men and women.

Meanwhile, the 16-24 group is way down to 55.2% today compared to 65.9% twenty years ago, and even the core 25-54 crowd is down to 82.1% from 84.1%.

Labor participation among men has been declining for decades, but took a sharp fall during and after the 2008 recession, with stabilization but no recovery since then:

Labor Participation: Men Chart Source: St. Louis Fed

So, under the surface of a healthy low 3.7% unemployment rate, there are big demographic shifts in who is working. Young people are working way less, and even core working-age people are working a bit less. Elders are working way more. Young men are working way less, in part because some of their historical jobs like manufacturing have been hit the hardest in recent decades. It's a pattern that needs more attention.

Median Net Worth is Weak

The U.S. has well over $100 trillion in household net worth:

Household Net WorthChart Source: J.P. Morgan Guide to the Markets

However, according to data from Credit Suisse's 2018 Wealth Report, the median U.S. citizen doesn't have a lot of wealth even though the mean does:

Wealth ChartChart Source: Author Constructed, Data from Credit Suisse

The U.S. median net worth is the 18th highest out of countries worldwide, so there are 17 countries ahead of us in total.

Final Thoughts

It's important to seek out diverse sources of facts and interpretation. Some headlines or individual data points can be misleadingly positive or negative, and it's important to have a framework for putting things in context and stepping back to look at the bigger picture, wherever possible.

At the current time, due to forces that have been in place for quite a while, the U.S. consumer appears to be weaker than the consensus opinion. Consumer credit as a percentage of GDP is at all-time highs. Unemployment is low but may be bottoming, and underlying labor participation shows troubling trends of elders working longer and younger people more likely not to be working. The U.S. median consumer has less wealth than his or her peers in many other developed countries, which when combined with high consumer credit levels, indicates fragility if the unemployment situation deteriorates.

Going forward, I continue to have a moderately defensive and globally diversified portfolio.

This article was written by

Lyn Alden Schwartzer profile picture
Author of Stock Waves
High-probability investing where fundamentals and technicals align!
With a background that blends engineering and finance, I cover value investing with a global macro overlay. My focus is on long-term fundamental investing, primarily in equities but also in precious metals and other asset classes when appropriate.


My work can be found at,, and within the Seeking Alpha marketplace where I work with the Stock Waves team to blend their technical analysis with my fundamental analysis for high-probability long-term setups.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is long U.S. stocks, foreign stocks, precious metals, short-term bonds, real estate, and other assets.

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