Student debt may or may not be a ticking time bomb like subprime mortgages. It isn’t securitized and sold, but its pervasive spread saps spending. William Potter/Shutterstock
As a nation, we ask a lot of our consumers, whose spending supports two-thirds of Earth’s biggest economy. In tough times, such as after the 9/11 attacks, we urged consumers to shop and eat out as a sort of civic duty. Today, we export American-style consumption to the world, with shopping malls in communist China, and McDonald’s feeding more than two million customers a day in the Middle East.
These ought to be boom times for the U.S. consumer, what with U.S. unemployment plumbing a 16-year low of 4.3%, wages ticking up, and the stock market hitting record highs. Yet Americans aren’t spending with quite the same gusto expected of consumerism’s standard bearer. Real U.S. personal spending is growing at about 2.6% year over year, when it should be closer to 4%, given the much-ballyhooed global recovery. Year-over-year growth in U.S. retail sales peaked at 8.3% in mid-2011 and has since slowed to 4.5%. Consensus expectations for U.S. consumers to shop more and more to extend our 95-month-long expansion may be doomed to disappoint.
The market can smell the apathy. Consumer-discretionary stocks are up 13% this year, second only to the mighty tech sector, yet most of the recent gains have come from just four subsectors—namely internet and direct-marketing retail, restaurants, cable, and home-improvement retail, notes Ned Davis Research. In fact, 70% of the sector’s 2017 returns have come from just four stocks: Amazon.com (ticker: AMZN), McDonald’s(MCD), Comcast (CMCSA), and Home Depot (HD). The rest, from autos to footwear stocks, are struggling, although bricks-and-mortar retailers’ woes are compounded by the existential despair caused by online competition.
No, consumer spending won’t fall off a cliff, or down the mall escalator, and speculation about consumers’ demise has tended to prove premature. Thanks to the levitating stock market and recovering home prices, household net worth is 37% higher than it was at the housing-bubble peak—and with 30% of our net worth now tied to stocks and mutual funds, let’s hope the market continues to behave.

So what’s curbing consumers’ enthusiasm? For a start, our consumption boom of the past few decades was fueled by a massive credit expansion, but that may have taken us as far as we can go. Total household debt in the last quarter reached a record $12.73 trillion, surpassing the $12.68 trillion that Americans owed at the height of the housing bubble. Borrowing costs are still historically low—the 30-year mortgage rate is near 3.9%, and mortgage debt-service payments recently were just 4.4% of disposable income, the lowest in decades.
But with the Federal Reserve raising interest rates, consumers, starting with marginal borrowers, are feeling the squeeze. And credit-card companies, including Capital One Financial (COF) and Discover Financial Services (DFS), are reporting rising charge-offs.
It doesn’t help that loan growth is starting to slow. Is it due to the uncertain timing of tax cuts and regulatory reforms, or just the natural exhaustion of economic growth that has been pulled forward, leaving little pent-up demand? Or are companies tapping the capital markets instead of banks? “I’ll answer: all of the above,” says Peter Boockvar, chief market analyst of the Lindsey Group.

THIS COULDN’T COME AT A LESS CONVENIENT TIME. Our economy is increasingly dependent on debt, and it now requires more and more credit to eke out the same percentage point of economic growth. It’s telling that year-over-year growth in personal spending on goods routinely surpassed 11% during the economic expansions of the 1960s and 1970s. But by the 1990s, that figure never got above 9%, and during the 2002-07 expansion it peaked at just 7.7%. In the current expansion, spending growth on goods got as high as 5.9% in early 2015. It was recently at 3.6%.
Our attitude toward spending and debt has changed, as well, and the bursting of the housing bubble has deflated our love of conspicuous consumption. Families are saving more, despite being penalized for saving by zero interest rates. It makes sense that the U.S. savings rate has historically moved in lockstep with interest rates, but since the financial crisis, savings have increased, even as rates have declined. It’s no coincidence that the aftermath of the crisis spawned today’s trend toward responsible consumption and, with it, bull markets in locally sourced kale, cage-free eggs, and Earth-friendly fabrics; it’s almost as if we need to feel virtuous before we can open our hemp wallets.
Household wealth data also mask the income inequality that is becoming a political hot-button issue. The world’s four biggest central banks may have expanded their collective balance sheets to a whopping $18.4 trillion, but the trillions they’ve pumped into the markets did not flow equally to all. Just 20% of the income growth during the early 1950s expansion went to the top 10% richest households, but by the current expansion their share grew to 80%, according to Pavlina Tcherneva, of the Levy Economics Institute at Bard College. Today, 76% of family wealth in America is held by the top 10% of wealthy families, and just 1% is in the hands of the bottom 50%, notes Conrad Hackett, of the Pew Research Center.
The inequality is especially acute among millennials, who are often maligned as entitled, but who—let’s be fair—came of age after 9/11 and started work during one of the worst recessions. The percentage of 18-to-34-year-olds still living with their parents has increased to about 32% from 27% over the past decade, and the average debt a graduating college senior is saddled with swelled to $35,000 in 2015 from less than $10,000 in 1993, notes CLSA strategist Matthew Sigel. Sure, mortgage rates are cheap, and home prices have bounced back since the crisis. But with U.S. homeownership down to 63% from its recent peak of 69%, and with rents rising, many millennials aren’t enjoying the fruits of the economic recovery.

Student debt is a particularly big albatross. Thanks to soaring tuition costs, it now makes up 11% of total household debt, versus 5% in 2008, and the burden increasingly is borne by millions of parents who have borrowed to help pay for their children’s education. A third of new student loans made recently are considered subprime, and 11% of student loans have gone 90 days or more without payment. Student debt may or may not be a ticking time bomb like subprime mortgages. It isn’t securitized and sold throughout the financial system quite like mortgage debt was, but its pervasive spread saps spending.
THERE’S A REASON “MATERIAL GIRL” EVOKES SUCH NOSTALGIA today: It’s because we’re no longer living in the same material world. Think of the U.S. as a big company—let’s call it America Inc.—with more than 100 million full-time workers, $18 trillion in sales, and $20 trillion in debt. The challenge it faces of middling growth is further compounded by escalating expenses. A detailed 2016 study by Gallup senior economist Jonathan Rothwell found that since 2007, real U.S. gross domestic product per capita has grown by just 1%, but our expenses have only gotten bigger. In particular, the share of national spending eaten up by three items—health care, housing, and education—has ballooned from 25% in 1980 to more than 36% by 2015.
It’d be one thing if consumers were getting more bang for those bucks, but Rothwell found, for instance, that literacy among 17-year-old Americans peaked in the early 1970s, and that math scores haven’t really improved much since 1986. Meanwhile, health care eats up 16.9% of our GDP, versus 8.8% for the average rich country in the Organization for Economic Cooperation and Development. No country comes even close to what Americans spend on health care each year, yet the U.S. ranks 36th in the world on life expectancy at birth.

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For some time now, Stephanie Pomboy of MacroMavens has highlighted the accumulating stress on consumers. “People who save are those who have the wherewithal to save,” she says, “while poorer consumers are borrowing out of distress to fund purchases normally paid for by income.”
The fact that delinquency rates are starting to turn higher “across all segments of the consumer space, despite near record-low interest rates, is a powerful indictment of the strong consumer narrative so widely embraced,” Pomboy says. How can folks have trouble paying their debts with unemployment at 4.3%, mortgage payments low, and net worth at record highs? “One shudders to imagine what delinquencies would look like if rates actually did move up, or—heaven forbid—stocks went down,” she adds.
Of course, a big tax cut this year could help, but a spending spree isn’t guaranteed. After all, we had “a tax cut of historical proportions” when gasoline prices fell from $3.69 a gallon to about $1.76 from mid-2014 to early 2016, which was akin to a $200 billion personal tax cut, notes David Rosenberg, Gluskin Sheff’s chief economist and strategist. But consumers merely responded by raising their savings rate to 6% from 5.8%.
OVER THIS PAST WEEK, the conference board’s survey showed further moderation in, among other things, the share of respondents who plan to buy a home or a major appliance, and auto buying plans retreated to a 10-month low. “I would say that frugality is back in style,” Rosenberg writes, “But it really never did totally go away this cycle, did it?”
Perhaps that’s why stock investors increasingly are flocking to multinational companies with big foreign operations. In May, the 50 Standard & Poor’s 500 stocks with the most overseas revenue gained 4.4%, while the 50 with the most domestic sales fell 0.9%, says Bespoke Investment Group.
A stock market trading at all-time highs carries with it the burden of great expectations, but investors might be looking to the burgeoning middle class overseas to pick up the spending slack and goose the global economy. American consumers have done their fair share, and they deserve a break.