The plight of the American consumer – Richard Mills

2025.05.07

When it comes to financial news, stocks, bonds, interest rates and inflation are some of the topics that garner headlines, but it’s consumer spending that matters most.

The amount that Stan and Suzy Sixpack spends represents close to 70% of US Gross Domestic Product. It’s around the same level globally. Economists therefore keep a close eye on both consumer spending and consumer sentiment to see which direction a country’s economy and the global economy are heading.

Here we take a deep dive into consumer spending — mostly US-centric but we will also look at Canada, China and Europe, as we build a case for a slowing US economy including a downturn in consumer spending, maybe not in March but it’s coming — aiming to prove that a US recession is likely to be called by the end of the second quarter and that by then, we could be well on our way to a combination of high inflation + high unemployment + low economic growth = stagflation.

Powell’s stagflation call

When President Trump initiated so-called “reciprocal tariffs” on more than 80 of its trading “partners” effective April 9, then postponed them the next day for three months, the Chairman of the United States Federal Reserve issued a stern warning.

“The level of the tariff increases announced so far is significantly larger than anticipated,” said Fed Chair Jerome Powell, adding that the uncertainty around tariffs could inflict lasting economic damage.

And then he dropped a bomb.

It’s only a matter of time, CNN paraphrased Powell, until Trump’s tariffs stoke inflation, push up unemployment and weaken economic growth, especially if the massive reciprocal tariffs that went into effect briefly on April 9 are put back in place.

“Jerome Powell just laid down the law with Trump,” David Russell, global head of market strategy at TradeStation, said in a commentary issued April 16. “It was a clear warning about stagflation, and a declaration that the Fed won’t enable the White House with rate cuts.”

A stagflationary environment is one where economic growth is decelerating and inflation remains high.

Is the US on a road leading to possible stagflation and recession? An official recession being called could be just two months away. Tariffs are thought by most to be inflationary. Decelerating growth means more job losses on top of federal job-loss programs underway. At AOTH we believe the US, and perhaps large parts of the global economy, are on the road to stagflation.

Video — The looming threat is stagflation: The new reality for the US economy

Indeed Trump’s sweeping tariffs have fanned fears the economy is facing tepid growth and high inflation (stagflation), with some economists, along with us at AOTH, calling for a recession by the end of the second quarter. The typical definition of a recession is two consecutive quarter of negative growth. The US economy in the first quarter contracted 0.3%.

Optimists counter this negativity by pointing out that US consumer spending increased solidly in March. According to Reuters, households boosted purchases of motor vehicles to avoid higher prices and shortages due to tariffs, but that did little to change economists’ views that the economy had shifted into lower gear.

While the Personal Consumption Expenditures (PCE) price index — the Fed’s preferred measure of inflation — was unchanged in March after advancing 0.4% in February, economists are forecasting a surge of inflation this year as Trump’s import duties raise the cost of goods.

Moreover, consumers’ one-year inflation expectations have jumped to levels last seen in 1981.

Confidence down, debt levels up

Consumer confidence is in the doldrums as shoppers worry tariffs will increase prices. Many economists have raised concerns that poor sentiment could slow consumer spending, hindering economic growth, states Investopedia under the headline ‘Will Consumers Be Able to Rescue the Economy Again?’

Two indexes below tell the story.

The U.S. Consumer Sentiment Index, which consists of about 50 core questions which cover consumers’ assessments of their personal financial situation, their buying attitudes and overall economic conditions, stood at 64.7 in February 2025. While that was an increase over the previous month, the chart below shows it’s the lowest since November 2023. The index slumped to its worst in 15 years when it hit 50 in July 2022, the same time inflation was at its 9% peak.

The Michigan Consumer Sentiment Index was at 52.2 points in April 2025 compared to 57 in March. Trading Economics says consumer sentiment fell for a fourth consecutive month to the lowest since July 2022, as consumers perceived risks to the economy, in large part due to uncertainty surrounding tariffs and the potential for resurgent inflation.

Investopedia notes consumers may have doubts about the economy, but that that hasn’t so far stopped them from spending. Economists saw good news in the April job report released last Friday, which showed better-than-expected jobs growth. However, jobless claims were also at their highest since February, and there could be weaknesses emerging.

Investopedia points to a potential slowdown in consumers’ discretionary spending, giving the example of several major airlines pulling their guidance for upcoming earnings amid weakening demand for domestic flights.

Canadian demand for US air travel has plummeted, with major Canadian airlines WestJet, Porter, Air Canada and Jet Blue all reducing capacity on popular Canada-US routes. Many Canadians are refusing to cross the border by land or air due to Donald Trump’s tariffs on Canada and his rhetoric over making Canada the 51^st state.

Americans may be spending but they are largely doing it on credit.

According to a recent MarketWatch analysis, “Americans are drowning in debt — to the tune of a record-breaking $18 trillion.” 77.4% of families carry some form of debt, with the median household owing over $80,000.

The $18 trillion refers to household debt, which reached an all-time high in the fourth quarter of 2024. Credit card debt is more common than mortgage debt, at 45.2% of households versus 40.9%. The median credit card balance is $2,700, down from a peak of $4,290 in 2007.

About one in five families hold education installment loans at a median amount of $24,500.

The service economy

Donald Trump is obsessed with bringing back manufacturing jobs to the United States, even though many positions have been permanently offshored and others made redundant by automation.

The plan fails to acknowledge the obvious, that the United States is no longer a manufacturing economy, it is a service economy. In fact, Trump is accelerating this trend, which is fleshed out in the infographic below. While US manufacturing saw a resurgence during Biden’s administration, the making of goods has slowed since Trump took over in January 2025.

The chart below shows the ISM Manufacturing PMI fell to 48.7 in April from 49.0 in March, for a fourth straight month of contraction in the manufacturing sector. New export orders fell steeply amid ongoing tariff-related disruptions.

The ISM survey also revealed U.S. manufacturers were grappling with rising costs and margin pressure, while ongoing trade uncertainty was disrupting supply chains, causing shipping delays, complex duties, and frequent changes in cost structures. At the same time, they said customer demand was becoming more volatile, with some clients delaying orders or pushing tariff costs back onto manufacturers. — Institute for Supply Management

The long-term decline in US manufacturing is apparent in the below infographic. Out of a total consumer spend of $18.8 trillion in 2023, services represented $12.7T and goods were just $6.1T.

Among the stand-out expenditures, housing and utilities ($3.3T) and health care ($3.1T) were the top two service categories, with Americans spending the most money on groceries and takeout in the goods category at $1.45T.

The consumer economy represented about 68% of GDP that year.

Shipments from China plummet

Shipping is an important metric when it comes to measuring the strength of an economy. A recent story by Yahoo Finance paints a glum picture of what is happening south of the border.

An embedded chart shows incoming shipments into the Port of Los Angeles are expected to be about 36% lower than the previous year in the week ending May 10.

LA is an important destination for goods exported to the US from China.

Economists believe the pullback in expected shipping container arrivals is likely an early sign of slowing trade activity between the US and China as Trump’s 145% tariff rate on China weighs on trade. It could also be an early sign of slowing economic growth to come.

The Peterson Institute for International Economics expects GDP growth to slow sharply this year. Source: Barron’s

For US consumers, the pullback could mean less goods on shelves and those that make it onto shelves will likely be more expensive.

Yahoo Finance quoted JPMorgan Asset Management chief global strategist David Kelly, who wrote in a research note that without a quick resolution to the trade war, imports, exports, and inventories all look set to fall sharply.

“Consumers could slow purchases in the face of higher prices and lower inventories while companies could cut back on hiring, capital spending and travel and entertainment expenses, all dragging on demand,” Kelly wrote. “Real GDP growth could be very slow, or even negative, over at least the first three quarters of 2025.”

Barron’s confirmed that; In the three weeks since the White House announced a 145% tariff rate on imports from China, the U.S.’s largest trading partner, data reveal that shipments to the U.S. from China  have plummeted. Ocean-container bookings from China to the U.S. are down more than 60%, reports Ryan Petersen, founder and CEO of Flexport…

“Our concern is that tariffs at this magnitude between the U.S. and China don’t just slow trade but also cause a sudden stop when orders are canceled, importers don’t take delivery, and you get a halt in trade flows,” says Michael Gapen, chief economist at Morgan Stanley. “Presumably, employment would adjust rapidly and then spill over into other sectors.”

Most bankruptcies in 15 years

Businesses, especially small ones, are having a hard time staying profitable in an increasingly hostile trade environment.

According to a report by S&P Global via Fox News, corporate bankruptcies among US companies increased in the first quarter to their highest level since 2010.

The first three months of 2025 saw 188 firms go belly up. That’s higher than the first quarter of 2024 which saw 139 bankruptcy filings, a 14-year high at the time. It compares to 254 filings in 2010, when the economy was reeling from the 2008-09 financial crisis.

“Companies, particularly those with weaker balance sheets, continue to face challenges as debt matures and needs to be refinanced at higher interest rates than at the time of issuance,” S&P Global wrote…

The largest number of bankruptcies in the first quarter of this year occurred in the industrials sector with 32, followed by consumer discretionary with 24. Those sectors combined to account for nearly 30% of bankruptcies in Q1. 

Missing car payments

Companies that go bankrupt obviously shed jobs. Another chink in the armor of consumers battling against ongoing inflation is missed car payments. On March 17, India’s Economic Times reported that Americans are missing car payments at a record rate, with 6.6% of subprime borrowers behind on loans, comparable to the 2008 financial crisis. Rising living costs and potential tariffs on new cars are exacerbating the situation. Car prices, borrowing rates, insurance premiums, and maintenance costs have all surged, making it difficult for borrowers to keep up.

Referencing Britain’s The Daily Mail, Economic Times said that based on Fitch Ratings data, almost 6.6% of subprime auto borrowers — those which poorer credit scores and greater financial risk — were at least 60 days behind on their car loans in January 2025.

The Daily Mail says the auto loan market has raised concerns that the US economy could be heading into a recession. The problem is compounded by the overall financial burden Americans are facing due to the higher cost of living. Consumers are not only having trouble paying their auto loans. Cars are getting more expensive, along with insurance, maintenance, and the price of everyday items like groceries.

The Anderson Economic Group says US consumers will get further burdened due to the trade war between the US, Canada and Mexico. Trump announced 25% tariffs on foreign cars and car parts in March. The Daily Mail said the new tariffs could increase a new car’s price between $4,000 and $10,000. The average price of a new vehicle has risen to about $47,000 and used vehicles are priced at around $25,000.

Borrowing rates have also risen, to over 9% on new cars and about 14% on used cars. Car insurance premiums have gone up 19% year over year, and repair and maintenance costs have risen 33% since 2020.

Fear and greed

Economists are closely following US stock markets to gauge the effects that the Trump administration’s economic policies are having on investors. Judging by the CBOE Volatility Index, otherwise known as the VIX, the tariffs are universally hated by the market.

All investors are consumers and some consumers are investors.

Yahoo Finance notes the VIX rocketed to 52.3 on April 8, as investors reacted to Trump’s “Liberation Day” tariffs. In the following days, the S&P 500 crashed, as strategists issued dire warnings, cut earnings estimates, and raised recession probability forecasts.

The VIX reportedly ran above 50 for only the 75^th time since 1990.

The S&P 500 has since rebounded 14%, as Trump softened his stance on trade policy including putting a 90-day hiatus on reciprocal tariffs.

While the article points out that the S&P has always moved higher one, three and five years after the VIX breaks the 50-mark, history also says the S&P will crash if the economy falls into recession — with an average decline of 31% during past recessions.

The problem with referring to historical patterns is that we are in uncharted territory with respect to the US economy; never before have such large tariff hikes been implemented so quickly.

Torsten Slok at Apollo Global Management recently raised his recession probability forecast to 90%. “If the current level of tariffs continues, a sharp slowdown in the U.S. economy is coming,” he wrote. Slok says the tariffs imposed by the Trump administration will be a 4-percentage-point drag on gross domestic product (GDP) growth in 2025, which all but guarantees the U.S. economy will contract.

Could more misery be coming down the pike for US consumers? There’s a graph for that too. The Misery Index tries to quantify how the average citizen is doing economically. It is calculated by adding the annual inflation rate to the seasonally adjusted unemployment rate.

The current Misery Index of 6.59% (4.2% unemployment + 2.39% inflation) for March 2025 is down slightly from the end of 2024 when it finished the year at 6.99%. In January it was 7%.

A look at the historical chart below shows Misery Index high points of 12.66% in the high-inflation, high-interest-rate environment of June 2022, and 15.03% in April 2020, the darkest days of the pandemic. The all-time Misery Index high since 1948 was 21.98% reached in June 1980, when the country was in a deep recession.

The global consumer

The US economy is the world’s largest economy, so it would be unsurprising if a slowdown, recession or the worst-case scenario, stagflation, spilled over to other countries. A 2025 report by RBC Capital Markets found that companies operating in and around Canada and the US have the highest potential to be adversely impacted.

Regarding US consumer staples, sales growth is slowing in North America, with worsening fundamentals. 80% of consumers are worried about tariffs’ inflationary effects, particularly on groceries, gasoline, and household goods.

Uncertainty around the tariff situation has likely led to hesitation across the supply chain, from the consumer to the retailer and the supplier. Anxiety from the consumer has led to a recent sharp dip in consumer confidence and sentiment.

Canada

The report says consumer confidence in Canada has significantly declined, with the Conference Board of Canada’s Consumer Confidence Index reaching record lows, dropping 32% from January to March.

Other highlights from the report:

• The share of consumers perceiving a deterioration in their current financial situation compared to six months ago increased 1.5 percentage points to 35.4%. Simultaneously, the proportion of consumers foreseeing a worsening future financial outlook rose by 4.7 percentage points to 33.9%, a high not seen since 2020.

• Consumers’ financial confidence has been on a steady decline since March 2022, when the Bank of Canada began its cycle of interest rate hikes to curb inflation. Rising borrowing costs have significantly increased debt burdens, while subdued purchasing power, driven by persistent high prices, has further strained household budgets.
  
• Despite easing inflation and falling interest rates, ongoing economic uncertainty remains a significant factor impacting consumer sentiment. Concerns about job security, coupled with broader economic volatility, including the possibility of an escalating trade war with the United States, are keeping Canadian households on edge.

The Financial Post reported 83% of Canadians have changed their spending habits due to economic uncertainty, with one-third saying they are worse off.

“Many Canadians are bracing for worst-case scenarios, adjusting their financial plans to safeguard against potential downturns.” As Canadians brace for rising costs, 66 per cent of respondents plan to reduce their expenses.

Europe

The RBC Capital Markets report saysThe UK and European consumer looks to be in reasonable shape overall, with low inflation, steady employment, real wage growth, and good savings rates. However, consumer confidence is dampened by inflation worries and potential job losses.

Another report by McKinsey & Company found that “Across Europe, consumers intend to limit their spending, but they deem some categories to be splurge-worthy.”

Consumers across Europe ranked inflation as their top concern, even higher than immigration and climate change.

Across several discretionary spending categories, European consumers indicated they intend to spend less over the next three months. The categories included meat & dairy, alcoholic and non-alcoholic beverages, apparel and accessories, footwear, cruises, home improvement supplies, domestic and international flights, hotel/resort stays, home electronics, home entertainment, furniture, gardening supplies, and sports equipment.

Three-quarters of European consumer said they traded down, often by buying less or buying from a lower-priced retailer.

Only about a third of European consumers said they intend to splurge over the next three months, with the numbers highest in Germany.

Of the categories in which Europeans said they plan to treat themselves, travel was first at 34% of all respondents, followed by restaurants/ dining out/ bars (31%), apparel (30%) and footwear (23%). Beauty and personal care tied with groceries/ food for home at 20%. 

China

Momentum in the consumer staples sector in China remains unchanged, according to the RBC Capital Markets report, although retailers warn of potential destocking and pricing issues.

NBC News reported in February that as China enters the Year of the Snake, Chinese consumers are feeling squeezed:

Though China’s consumption expenditure per capita grew more than 5% last year, to about 28,200 yuan ($3,900), consumer confidence is at all-time lows, affecting retail sales in sectors such as clothing and cosmetics. That could limit long-term gross domestic product growth as China adjusts to slower growth overall.

Increasing consumption is considered vital for reducing China’s reliance on exports, all the more so as U.S. tariffs and Chinese counter-tariffs stir fears of an all-out trade war between the world’s two biggest economies.

Capital outflows

Some investors have soured on the US stock market and are trading European stocks instead. Year to date, as of May 5, the STOXX Europe 600 is up compared 5.22% to the S&P 500 which has lost 3.72%. Tech stocks in Hong Kong at the beginning of March had surged 30%. European stocks staged their best performance in a decade against Wall Street in the first six weeks of 2025, Reuters said.

The trend may be indicative of a larger shift underway. Reuters reports

A historic global trade war, a proposed $1.2 trillion European fiscal bazooka and the emergence of China as tech race leader are upending global flows of money, marking a potential turning point for investor capital away from the United States.

With Europe and China poised to spend big on stimulus, the dollar is looking less appealing.

The US Dollar Index DXY is down 9% year to date.

“We had been long the dollar against the euro and closed that position over a week ago [from March 5]. It had lost impetus,” said Mark Dowding, chief investment officer at RBC’s BlueBay fixed income team. “The behaviour of Trump has diminished the appeal for U.S. assets in general.”…

Almost uninterrupted outflows from China-focused funds after Trump’s election win in November reversed in early February, drawing in some $3 billion since then, according to Lipper data…

The emergence of DeepSeek not only shattered assumptions about the cost and efficiency of the race to build out AI, but of how close behind Western companies China really was.

Hong Kong-listed tech stocks have roared 24% higher since January 27 [to March 5], while a basket of U.S. tech megacaps has dropped 12%.

Yang Tingwu, vice general manager of asset manager Tongheng Investment, said China’s stock market is already immune to higher U.S. tariffs as the country’s growing strength is underpinning domestic assets.

“If you look at TikTok, Xiaohongshu or DeepSeek, China’s technological clout is expanding,” Yang said.

Countries have also been selling US debt at an alarming pace.

In mid-April the yield on the US 10-year Treasury hit 4.592%, the highest since February, with the 30-year bond notching its highest since November 2023. Yields go up when bonds sell off and prices drop.

CNBC quoted Chen Zhao, chief global strategist at Alpine Macro, saying that China is selling US Treasuries and converting the proceeds into euros or German bunds.

Garry Evans, an analyst at BCA Research, said the culprit in Japan’s recent Treasury sales was not the Japanese government but life insurer Nippon Life.

Japan and China are the two leading foreign holders of US Treasuries.

The selling could also have been fueled by a combination of European and Japanese pension accounts selling long-dated Treasurys to purchase European fixed income.

Conclusion

It’s too early to proclaim a condition of stagflation in the United States but the economic indicators are certainly pointing in that direction.

Consumer spending makes up nearly 70% of US GDP so the condition of the American consumer is of utmost importance.

Our research found US consumer sentiment to be low, raising concerns that this could slow consumer spending and hinder economic growth.

Inflation is not yet a problem, but economists are forecasting a surge of inflation this year as Trump’s import duties raise the cost of goods.

Perhaps most disturbing, consumers’ one-year inflation expectations have jumped to levels last seen in 1981, when the US was in recession.

US consumers are still spending but they are amassing a large amount of debt. Interest rates have fallen but they could easily go back up if the Federal Reserve feels the need to fight inflation. Higher rates will impact consumers’ ability to service mortgages, loans and credit card debt — at the same time as prices on tariffed goods shoot up.

Consumers are missing car payments, and the level of corporate bankruptcies has reached a 15-year high.

The manufacturing sectors appears lost at sea, with the ISM Manufacturing PMI falling for the fourth consecutive month. Import cargoes through the Port of Los Angeles have plummeted, indicating a major slowdown in trade with China.

Unless tariffs are called off, economists see US GDP growth falling sharply this year, ticking another box for impending stagflation.

Investors are growing weary of the stock market turbulence, and some are electing to invest in Europe instead. The dollar is weakening amid foreign sales of US Treasuries, which is causing bond yields to go up — the opposite of what the Trump administration wants.

It’s not only the US consumer that is hurting and/or concerned about the trade war and inflation. The Conference Board of Canada’s Consumer Confidence Index reached record lows, dropping 32% from January to March. Simultaneously, the proportion of consumers foreseeing a worsening future financial outlook rose by 4.7 percentage points to 33.9%, a high not seen since 2020.

European consumers are planning on spending less on a number of discretionary spending categories, but a minority, about 30%, aren’t willing to forego so-called splurge items such as travel. Canadians, by contrast, are canceling trips to the US for political and economic reasons, with many planning vacations within Canada.

We at AOTH will be keeping a close eye on consumer sentiment and consumer spending over the next few months as the tariff war plays out. Remember, if second-quarter growth is negative the US government will be forced to admit the country is in recession.

Not a good look for Trump, who declared in January that the “golden era of America begins right now.”

In one sense he’s right. Amid global economic chaos and geopolitical uncertainty, gold hit an all-time high of $3,500 an ounce on April 22. Year to date, the precious metal is up 29%.

Richard (Rick) Mills
aheadoftheherd.com

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