They Are Out of Cash

I’ll tell you straight out: I’m worried about consumer spending and what a spending slowdown could mean for stock prices.

Consumer spending accounts for over 70% of U.S. economic activity. This is why things like trade imbalances and China’s treasury bond ownership never really have an impact. Oh, those things make for great headlines — “China dumps Treasuries” always sounds like the sky is falling. My personal favorite is “De-dollarization Threatens US Economy “ — as if countries would really rather trade rubles…

But has China’s Treasury bond ownership ever affected your home’s value? Have you heard of someone losing their job because Saudi Arabia will accept yuan for its oil? Of course not. Economists and strategist-types love to ponder that kind of crap. But out here in the real world, that stuff does not affect our day-to-day.

And it’s because the U.S. is over 70% self-sufficient. We’re the biggest energy producer in the world. 90% of the world’s trillion-dollar companies are American. America has the patents, the money, the military, and the standard of living. We don’t need much from other countries.

So long as Americans keep spending money everything is fine.

A recession is defined as two consecutive quarters of negative GDP growth. And the only way recession happens is if Americans spend less money.

Disposable income is now at 18-month lows. Americans don’t have as much cash to spend as they did just a few months ago…

This is a problem.

We heard from several companies during the first-quarter earnings season that the consumer is weakening. Target, Starbucks, Home Depot, McDonald’s – all said spending was becoming a problem.
Household debt rose $184 billion in the first quarter. But perhaps the worst stat is that 9% of all credit card balances and 8% of all auto loans have fallen into delinquency.
The $2.1 trillion in savings Americans built up during the pandemic years is now gone. That’s a big reason why real spending actually fell slightly in April.
First quarter GDP growth came in slower than originally expected. The initial estimate of 1.6% was revised down to 1.3% growth last week.

Almost every measure you can find shows that the U.S. economy is slowing down because consumer spending is slowing.

The Fed’s Rate Cuts Might Sound the Alarm

Interest rate hikes are supposed to slow spending and thereby slow the economy. For months, economists have been scratching their heads as to why the U.S. economy has remained so resilient as the Fed hiked interest rates at a record-setting pace.

It sure looks as though they can stop wondering. The U.S. economy is slowing down.

Last November, Fed Chair Powell said there would be rate cuts coming this year. That was because he believed inflation was under control. He was wrong. Most inflation data has ticked higher each month this year.

But now, the Fed may be cutting rates because the economy is teetering on the brink of recession.

Less than two weeks ago, on May 23, the Dow Industrial Average sold off 635 points in a single day. I consider that a warning shot across the bow of the market. The odds are high that there is more downside coming.

Godspeed,

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

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