The Cost Of Money

It is never a good idea to bet against the American consumer. The strength of consumer spending is a hallmark of the U.S. economy, which is both the envy and the engine of many other nations.

There have been only two periods since 1960 when the monthly year-over-year percentage change in consumer spending fell into negative territory. In other words, only twice in the last sixty-some years has aggregate spending contracted instead of just slowing, and both periods were short-lived.

But not all spending is the same. Where consumers get the money to spend is important for brands to know, especially now. Obviously, they spend what they earn, but there’s more to it than that.

The two periods of spending contraction were both in this century: after the financial crisis; and after the start of pandemic lockdowns. Spending had to be jump-started each time. 



A lot of things were involved, the job market in particular, but there was a critical factor each time.

In the case of the financial crisis, it was a cheap credit stimulus. 

In the case of the pandemic, it was excess consumer savings.

What’s ahead will be different.

A Quick Look Back

After the financial crisis, a big part of what kept people spending was ZIRP – or the zero-interest rate policy of the Federal Reserve – which made credit cards, car loans, mortgages and everything else more affordable.

During the pandemic, it was two large tranches of relief dollars, one each by Trump and Biden. Of course, people couldn’t spend much of it during a shuttered economy, so they banked it. To the tune of $2.5 trillion, plus or minus. When things reopened, they spent it, and how.

The spending glut from excess savings helped spike inflation, but spending was undaunted by inflation, largely because excess savings dampened the impact. The Fed responded by raising interest rates – now at the highest level in two decades – which cooled off monthly spending growth.

At the same time, consumers have used up the buffer in their budgets, as excess savings are running out with little in new savings being set aside. Which raises the question of where the money will come from next.

A Look Ahead

With no more cheap credit or excess savings and with interest rates higher for the foreseeable future, consumers will be left with costly credit and its impact. Inflationary cost-of-living pressures are giving way to post-inflationary cost-of-money pressures. We see this in telling ways.

  • In the University of Michigan’s sentiment tracking, the recent drop in concerns about high prices has been more than offset by concerns about rising interest rates.

  • The Fed’s mortgage affordability index is the lowest since tracking began in 2006.

  • Average rates on car loans and credit cards have jumped significantly. 

  • Loan delinquencies, while still in range of recent record lows, are trending up.

  • Non-business bankruptcies are also up, after falling each year from 2019 to 2022.

More expensive credit means a smaller pool of both dollars and buyers. The full impact always takes a while to percolate through the economy, and thus longer to cycle out, as well.

High-income households, which account for a disproportionate share of spending, are squeezed more by high interest rates than by high prices. For everyone, costly credit is something that starts at home, so to speak, not at the store, like high prices, so it is keenly felt.

All of which means no let-up of the pressure on brands to invest in value. Consumers choose no differently in bad times than in good ones. It's about budgeting and setting priorities.

Or as I like to joke, only Elon Musk has more money than God; all the rest of us live on a budget.

Consumers are always deciding what has enough value to keep in the “spend-money” bucket and what can be tossed into the “save-money” one.

Brands that reduce value during tough times also take away the reasons consumers have for buying them. Less value is permission for consumers to save money. Always true, and now more than ever as costly credit looms larger as a buttress of consumer spending.

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