Why Broke Consumers Keep Spending Money

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SPEAKER_4 (1:15)

Consumer spending is up roughly 2.6 percent.

SPEAKER_5 (1:18)

Okay.

SPEAKER_4 (1:19)

And retail sales have actually grown by like 5.4 percent.

SPEAKER_5 (1:22)

Which is a pretty solid number.

SPEAKER_4 (1:23)

But at the exact same time, consumer confidence just plummeted to a 12-year low.

SPEAKER_5 (1:29)

Wait, 12 years?

SPEAKER_4 (1:30)

12 years.

The conference board just put out their confidence index, and they completely missed expectations by a very wide margin.

They dropped all the way down to 81.9.

SPEAKER_5 (1:41)

I mean, that is just wild because you have people reporting this immense financial distress, just describing their economic situation in completely dismal terms, but they are simultaneously swiping their credit cards at the highest rate we have seen in recent months.

SPEAKER_4 (1:57)

It makes no sense on paper.

SPEAKER_5 (1:59)

The physical act of spending money is just entirely divorced from the psychological state of the person doing the spending.

SPEAKER_4 (2:06)

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SPEAKER_5 (2:14)

So if people feel this awful about the economy, how and why are they still spending so much money?

SPEAKER_4 (2:20)

Well, I think you have to draw a hard line between what people do and what they say.

SPEAKER_5 (2:24)

Right.

SPEAKER_4 (2:25)

So you have your hard data and your soft data. The hard data is the receipt. It shows solid spending growth, particularly that outsized jump we saw in the most recent monthly report.

SPEAKER_5 (2:36)

Because that's what is actually happening at the register.

SPEAKER_4 (2:38)

Exactly. But the soft data is just the feeling.

And right now, that feeling is driven entirely by fear regarding gas costs or the housing market and the labor market.

SPEAKER_5 (2:48)

But soft data has some structural flaws, right? Because humans overreact.

SPEAKER_4 (2:52)

Oh, for sure.

SPEAKER_5 (2:53)

Surveys capture your anxiety about the future. They capture the stress of watching gas prices tick up by 12 cents on your way to work. They do not capture the actual balance in your checking account.

SPEAKER_4 (3:03)

Yeah, that's a good point.

SPEAKER_5 (3:05)

I mean, a person can complain about the cost of a coffee while standing in line, waiting to hand over their card for that exact coffee.

SPEAKER_4 (3:11)

Right, but you cannot dismiss the soft data just because it includes emotion. I mean, if you look at past economic cycles, specifically the early 90s and the mid 2010s, you see distinct periods where confidence in spending diverged exactly like this.

SPEAKER_5 (3:26)

So we have seen this movie before.

SPEAKER_4 (3:28)

We have, and the divergence always resolves. The question is just which direction it breaks.

SPEAKER_5 (3:34)

Meaning, does the spending drop to match the bad mood or does the mood improve to match the spending?

SPEAKER_4 (3:38)

Exactly, and the historical pattern shows sentiment leading spending by about a year.

SPEAKER_5 (3:43)

Okay, so the bad feelings come first.

SPEAKER_4 (3:45)

Right. Changes in how you feel eventually bleed into how you act. There's just a delayed reaction.

So if these bad feelings hold, the spending cliff is coming.

SPEAKER_5 (3:56)

Because the gap between feeling poor and acting poor is simply the time it takes to exhaust whatever resources you have available to keep up appearances.