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The Consumer Is Tapping Out
Apr. 11, 2025 8:10 AM ETACTV, AFMC, AFSM, ARKK, AVUV, BAPR, IVOO, IVOV, IVV, IVW, IWC, IWM, IWN, IWO, IWP, IWR, IWS, IYY, QQQ, SPLV, SPMD, SPMO, SPMV, SPSM, SPUS, SPUU, SPVM, SPVU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SPYD, SPYG, SPYV, SPYX, SQEW, SQLV, SSO, SSPY, SVAL, SYLD, TMDV, TPHD, TPLC, TPSC, UAUG, UJAN, UMAR, UMAY, UOCT, UPRO, USMC, USMF, USVM, MAGS, TBT, TLT, TMV, IEF, SHY, TBF, EDV, TMF, PST, TTT, ZROZ, VGLT, TLH, IEI, BIL, TYO, UBT, UST, VGSH, SHV, VGIT, GOVT, SCHO, TBX, SCHR, GSY, TYD, VUSTX, FIBR, GBIL, UDN, USDU, UUP, RINF, AGZ, SPTS, FTSD, LMBS, DDM, DIA, DOG, DXD, EPS, EQL, FEX, HUSV, IWL, JHML, ILCB, OTPIX, PSQ, QID, QLD, QQEW, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SH, SPDN, SQQQ, SRTY, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, URTY, UWM, VFINX, VOO, VTWO, VV

Lance Roberts
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Summary
The recent implementation of tariffs has the media buzzing about increased recession odds as the consumer faces potentially higher costs.
While recent economic reports, like the latest employment report, still show robust growth, those data points run with a lag that hasn’t yet caught up with reality.
Unless wage growth accelerates or interest rates decline meaningfully, the pressure on households will continue to mount.
young woman buying cosmetics

97/iStock via Getty Images

The recent implementation of tariffs has the media buzzing about increased recession odds as the consumer faces potentially higher costs. While recent economic reports, like the latest employment report, still show robust growth, those data points run with a lag that hasn’t yet caught up with reality.

As we have discussed, the American consumer is the backbone of the U.S. economy and comprises nearly 70% of the GDP calculation. While GDP surged following the economic shutdown due to the massive flood of stimulus that fueled a savings surge, consumption as a percent of the economy has remained flat since the turn of the century. The reason is that despite the surge in savings, the consumer was also faced with rising inflation, which left them struggling to make ends meet.

PCE as percent of GDP vs savings rates
This dilemma is better illustrated by the chart below. The blue line is the personal savings rate, and the red line shows the debt needed annually to bridge the gap between the inflation-adjusted cost of living and savings and incomes. As shown, at the turn of the century, the consumer was no longer able to fund their living standard through just income and savings. The fact that consumers were forced to take on increasing debt levels to maintain their living standards explains why consumption as a percent of GDP has remained stagnant over the same period.

Gap between savings debt and living standard
At the heart of the problem is the collapse of household balance sheets in the lower-income and middle-income brackets. These groups have depleted the excess savings accumulated during the pandemic and are turning to high-interest borrowing to bridge the gap. The Philadelphia Federal Reserve reported that the share of active credit card accounts making only minimum payments surged to 10.75% in Q3 2024—a record high. This statistic isn’t just a warning about credit health; it points to widespread cash flow stress.

Share of credit card account holders only making minimum payments.
In addition, more consumers are falling behind on their monthly card payments. The balance-based 30+ days past due rate increased 33 basis points year-over-year to 3.52% in the third quarter of 2024. This represents more than double the delinquency rate of 1.57 percent at the pandemic low in the second quarter of 2021.

Delinquency by loan type
More alarming is the growing use of Buy Now, Pay Later (BNPL) services. Notably, those services are not being used for large discretionary purchases but for food.

Recent surveys show that more consumers are increasingly relying on installment payment platforms like Klarna and Affirm to afford meals. Initially, the design of the BNPL model was for luxury or semi-durable goods. However, its expansion into groceries signals deep-rooted affordability issues. Debt is no longer just a tool for convenience; it’s a necessity for millions’ survival.

The problem with Trump’s trade war now is that it comes when consumers are already showing clear signs of distress. According to recent data, both from the Federal Reserve and corporate earnings reports, the consumer’s financial cushion that kept consumer spending alive in 2021 and 2022 is gone. What remains is a fragile consumer base increasingly reliant on credit and debt to afford necessities. While inflation has slowed, its damage is lingering. Now there is growing evidence suggesting that a recession and deflation are more immediate risks.

Consumer Confidence Declining
Consumer stress isn’t limited to anecdotal indicators—it’s now showing up in corporate earnings and executive commentary. During the company’s earnings call, Doug McMillon, CEO of Walmart, stated that many customers are under “budget pressure.” They are also exhibiting “stressed behaviors,” including spending reductions across general merchandise. Specifically, he warned that “For many customers, the money runs out before the month does.”

Similarly, Dollar General CEO Todd Vasos painted an equally concerning picture. He described his customers as “struggling more than ever before.” Todd added that some are now forgoing non-discretionary items, like medication or hygiene products, to afford groceries and fuel. He said, “These customers are making trade-offs we haven’t seen in years.” Concurring with that warning was Jane Fraser, CEO of Citigroup. She observed that consumers are “becoming more cautious” and focusing spending on smaller, lower-cost purchases. While this signals a growing defensive posture, often associated with recessionary conditions, they are also deflationary. When consumer behavior shifts en masse from aspirational to survival-based, the ripple effects are inevitable.

When we combine all the various measures of confidence into a single index, the correlation to GDP is unsurprising.

Confidence Composite vs GDP
Furthermore, that decline in confidence leads to changes in the rate of inflation. This should be unsurprising since prices reflect supply and demand. As demand declines, prices fall to levels where demand for those products, goods, or services exists.

Confidence composite vs inflation
The data supports this narrative. Real personal consumption expenditures, the most significant component of GDP, are weakening. Once optimistic, the Atlanta Fed’s GDPNow model has revised estimates lower. Such was due to the decline in spending on goods and services. High interest rates, implemented by the Federal Reserve to curb inflation, now exert a secondary effect. Those rates are strangling credit access and making existing debt more expensive.

Housing data also reflects economic strain. Residential building permits and starts have declined markedly over the past six months, and homebuilder confidence has also deteriorated. First-time homebuyers—often a leading indicator of broader consumer strength—have retreated sharply due to affordability concerns.

When combined with increased pressures from higher taxes (read tariffs), the data is sending a warning.

The Risk Of Recession (and Deflation) Have Increased Markedly
The current data point toward a recessionary risk. Deflation is highly correlated to economic growth rates, wages, and rates. Unsurprisingly, recessions reduce inflation as demand for goods and services collapses. While inflation may be “sticky,” the recent decline in bond yields and wages suggests consumer demand will decline this year.

Economic composite correlation
When tariffs, an additional tax on consumers, increase the cost burden, the reaction historically is not expansionary. As consumers contract spending, employers reduce business investment (demand) and cut employment (supply of wages). As shown, while volatile, plans to expend capital for investment purposes correlate with real private investment (which feeds into GDP.) While this data does not currently reflect the tariff impact, it was already suggesting much weaker growth. We suspect the outlook for CapEx has declined markedly in recent weeks.

Capex vs Real Private Investment
We are seeing “demand destruction” caused by rising input costs due to tariffs against an already weak consumer backdrop. That combination of inputs will likely lead to higher unemployment, slower growth, and deflationary pressures in the economy unless there is a supply shock due to some unforeseen event like another “oil embargo.” Outside of such an event, in an environment where consumer demand is falling due to the inability to afford what’s available, suppliers will have to cut prices to find buyers.

Furthermore, credit conditions also reinforce the recession risk. Banks have tightened lending standards across consumer and commercial lines as credit card delinquencies have ticked up sharply, particularly among borrowers aged 18–39. The Federal Reserve’s Senior Loan Officer Opinion Survey shows a continued reduction in credit availability—making it even harder for stretched consumers to borrow their way through.

This reflects a critical turning point: the U.S. consumer is no longer a driver of economic growth but a potential drag on it. When nearly 70% of GDP depends on consumption, a weakening consumer poses systemic risks. A policy pivot may be necessary, and the calls for further Fed rate cuts this year are rising, with markets expecting four rate cuts this year. However, for now, with inflation still above target and the labor market gradually cooling, policymakers lack the room to cut rates aggressively without potentially reigniting price pressures. However, as the impact of tariffs causes a marked reduction in demand, those fears will likely give way to concerns about economic disruption.

Fed Rate Cuts In 2025
In short, the American consumer is tapped out. The savings buffer is gone, wage growth is declining, and credit costs are rising. Corporate America is already adjusting to this new reality, with companies issuing cautious guidance for 2025. Even the tech sector—previously resilient—is showing signs of demand compression in consumer-facing verticals.

Unless wage growth accelerates or interest rates decline meaningfully, the pressure on households will continue to mount. That means recession and, ultimately, deflation—the more immediate threat to the U.S. economy. While deflation may seem the “out of consensus” view – if demand destruction continues unchecked, the more pressing concern is a downturn in demand. Declining real incomes and credit exhaustion are already warning of that risk.

Investors and policymakers would do well to focus less on inflation in isolation and more on the consumer’s deteriorating balance sheet. That’s where the next economic shock is currently hiding.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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This article was written by


Lance Roberts
32.27K Followers
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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Basis Trade Sent Yields Soaring - Is It A Warning?
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Volume in percent

More alarming is the growing use of Buy Now, Pay Later (BNPL) services. Notably, those services are not being used for large discretionary purchases but for food.

Recent surveys show that more consumers are increasingly relying on installment payment platforms like Klarna and Affirm to afford meals. Initially, the design of the BNPL model was for luxury or semi-durable goods. However, its expansion into groceries signals deep-rooted affordability issues. Debt is no longer just a tool for convenience; it’s a necessity for millions’ survival.

The problem with Trump’s trade war now is that it comes when consumers are already showing clear signs of distress. According to recent data, both from the Federal Reserve and corporate earnings reports, the consumer’s financial cushion that kept consumer spending alive in 2021 and 2022 is gone. What remains is a fragile consumer base increasingly reliant on credit and debt to afford necessities. While inflation has slowed, its damage is lingering. Now there is growing evidence suggesting that a recession and deflation are more immediate risks.

credit conditions also reinforce the recession risk. Banks have tightened lending standards across consumer and commercial lines as credit card delinquencies have ticked up sharply, particularly among borrowers aged 18–39. The Federal Reserve’s Senior Loan Officer Opinion Survey shows a continued reduction in credit availability—making it even harder for stretched consumers to borrow their way through.

Macroeconomic Analysis: Tariff Strategy, Isolating China, & The United Front
President Trump has announced a 90-day reciprocal tariff pause for all nations except China. This suggests that the U.S. is urgently negotiating bilateral or multilateral deals to eliminate most tariffs with key partners. Washington appears to be signaling that closer economic alignment with the U.S. may come with reduced exposure to China. An economic war with China can only be won by building a broad coalition. This involves leveraging the combined market power of the U.S., EU, and other partners to offset losses from Chinese trade and pressure Beijing.

If the U.S. succeeds in rallying allies to a free-trade coalition, U.S. importers could swiftly pivot to alternative suppliers within this tariff-free network. Companies like Apple Inc. (AAPL) will be fine in the medium term in this scenario. From a geopolitical standpoint, a unified U.S.-led trading bloc would economically isolate China, incentivizing policy moderation in Beijing and urging it to create more integrated submission to global democratic and capitalist architectures. In other words, the message from Washington is "join the world alliance we are leading, or isolate yourselves to inevitable contraction." This endgame is not being recognized by the market.

New deals or a revamped Trans-Pacific Partnership could include countries like Vietnam, Malaysia, Japan, Australia, and possibly the EU via a separate pact, all lowering tariffs among themselves and with the U.S. We're likely going to see new semiconductor plants in Taiwan, Mexico, or India to serve U.S. demand, instead of expansions in China. Global trade is not collapsing, just rerouting.

China's response to "Liberation Day" included outreach to the EU, Japan, and South Korea, urging a joint stand against U.S. "trade tyranny". The EU is internally divided on China policy, but Europe also exports heavily to China and may resist a U.S. push to choose sides. However, I think a top-down approach here of EU leaders pushing the U.S. alliance is almost inevitable, given the deeply embedded nature of NATO and the democratic ideals that hold us together. The EU's alignment with China appears low probability, and would be a reaction to the fear of losing power rather than a shrewd alignment of values. In contrast, deeper alignment with the U.S. offers a stronger foundation for shared democratic principles and the potential for a global trade front. Ultimately, this could serve to counterbalance China's ideological divergence and its strategic partnerships with Iran, Russia, and North Korea. All four of these states have raised significant threats to the current global order.

To be clear, I don't think the Trump 2.0 era marks the end of globalization. Instead, it marks the end of an old, defunct form of globalization that did not respect the interdependence of nations. What is reviving now is national prosperity with a unified coalition; a much stronger, more democratic, and less hegemonic vision for long-term global peace and unity. Again, the market does not yet see this, and that is fine. I respectfully ask that you consider that I could be right. Time will tell.

Macroeconomic Risks: Contraction, Inflation, China's Economic Resilience, & Hot Wars
The IMF warns that a severe technological and trade decoupling between China and truly democratic countries could even cost nations up to 12% of GDP over time when you factor in lost R&D collaboration and economies of scale. According to my research and study of U.S. companies, less than 30% of S&P 500 (NYSEARCA:SPY) (SPX) (SP500) sales are foreign, and less than 10% come from China alone. This is just an estimate. Therefore, in a heightened international trade environment, we are looking at profit margin compression and an earnings recession in trade-sensitive sectors at least.

A failure to restore free trade with allies would also mean global trade flows shrink, not just U.S.-China flows. The World Bank and IMF have warned that a slide toward 1930s-style protectionism could sap global growth for years, as each country turns inward. Economic iron curtains basically leave all economies more vulnerable. This is not the endgame; if Trump thinks isolationism is favorable long-term, he is mistaken. But it is my belief that the current U.S. administration is a master at realpolitik, executing its strategy with practical tactics rather than theoretical frameworks. The real endgame here is to economically isolate China, and incentivize systemic reform, gradual economic liberalization, and a shift toward democratic capitalism within its economy. This represents my working thesis, and currently informs my strategic portfolio modeling.

The U.S. Federal Reserve currently faces a dilemma: normally a growth shock would result in rate cuts, but if that shock comes with a supply-driven inflation spike, the Fed may be more cautious in easing policy. This could result in stagnant growth with persistent inflation, which is the worst-case for equity valuations. Without a reversal of the tariff regime through an established and united free trade bloc without China, that is led by the U.S., a repricing of equities to lower multiples is likely, especially for globalized tech stocks constituting the Nasdaq (NDX) (NASDAQ:QQQ).

China has accused the U.S. of "bullying", but in reality, China has increased military activity near Taiwan, the White House has claimed it has "subsidized and otherwise incentivized PRC chemical companies to export fentanyl" into the United States, developed a relationship with the regime running Iran (widely documented as a state sponsor of terrorism by the U.S.), and allied with Russia amid its military aggression in eastern Ukraine in recent years. This must end for long-term international prosperity and market stability; China's calls for other countries to stand up against the United States' trade negotiations appear strategically misguided and ignorant of underlying geopolitical dynamics.

That said, China's economic resilience could be underestimated. China may redirect its trade to emerging markets and domestically; it has a vast market where it can rely more on internal consumption. If China forms its own trade pacts, this could also be detrimental to this coalition strategy to isolate China. Many U.S. allies have mixed incentives and are deeply invested in the Chinese market. If global tariff elimination deals falter, the U.S. could be left partly isolated itself, having burned bridges with China but not fully cemented new ones with everyone else. The onus is on the U.S. to fortify its international relations through strong, fair, and free trade agreements and exceptional diplomacy with democratic and capitalist nations. China may also start retaliating severely, including in the energy and commodities space. All of these dynamics could lead to stagflation and the Fed being forced to hike or stay restrictive for longer to tame inflation, worsening a downturn. Again, the onus is on the U.S. administration to create more international trade freedom from this tariff ploy, not less. That could rebalance China successfully and keep global growth intact.

There is also the risk of a Taiwan hot war as China's retaliation to this trade war. However, that would be an act of self-destruction and very unwise. I have written about the negative implications of this in detail before. A nuclear or lower-power missile incident in Iran would also radically destabilize markets, and it is a potential outcome if Iran does not discard its current nuclear security ambitions and the U.S. intervenes with such hard power.

The Crowd Runs In Fear, And I Buy
There is no doubt that market sentiment has turned bearish. We have seen a flight to non-U.S.-denominated cash; this is evident in the U.S. long-term bond yield rising, causing the inverted yield curve to disinvert, the dollar fall in value, and the U.S. equity market to decline. Usually, this is a signal of lower investor confidence in U.S. fiscal health, but given the complex geopolitical plays currently underway, the market's fear is my opportunity. A united front for free trade will see a return of confidence, the Fed funds rate will come down, and by H1 2026 the sun will have fully risen.

Any hint of positive news has already sparked outsized relief rallies. Consider this a sign. Once international trade negotiations are established by the U.S. with other nations, without China, equities are going to blossom. In other words, "economic nuclear winter" won't last long.

I'm advocating for tranching into weakness. Use the panic-driven selloffs to start accumulating positions gradually, rather than trying to time the exact bottom. I've reduced my cash equivalents position, which I established over six months ago, from 30% to less than 20%. I bought NVIDIA Corporation (NVDA), RTX Corporation (RTX), Advanced Micro Devices, Inc. (AMD), Taiwan Semiconductor Manufacturing Company Limited (TSM), Micron Technology, Inc. (MU), and Nebius Group N.V. (NBIS), in that order. I was bearish on Apple just a week ago, but since analyzing the macro and geopolitical climate in-depth, Apple is a reasonable long-term Hold or Buy right now. Even though it faces the most near-term disruption due to its current reliance on Chinese manufacturing, many of its products have now been exempt from the heavy U.S.-China tariffs. I also believe the U.S. has a unique opportunity to ramp up Big Tech hardware manufacturing onshore using AI and robotics in the coming decades, eliminating human labor cost concerns.

Tranching works right now because as earnings season unfolds, a slew of companies will likely guide lower for 2025 due to tariffs and lost sales in China. The market is grappling with a genuine repricing of earnings estimates downward, and this includes companies in the Dow Jones Industrial Average (DJI) due to broader macroeconomic headwinds. We are likely in a period where ~19-20x forward earnings on the S&P will contract to ~15-16x if uncertainty stays high. If you're on the same page as me, uncertainty will not stay high, so let the market price in this fear and buy it as conditions progress. Once the green light flashes on a U.S.-led international free trade bloc against China, expect equity markets to erupt. If you're sitting in cash right now and not tranching in, you'll have missed the alpha.

Alternatively, there is a risk here that Big Tech names will suffer through leadership rotation in the market away from global growth companies with China exposure toward more U.S.-centric, value-oriented stocks. However, I think this outlook is much too short-term. Consider that we are about to enter an age dominated by robotics and AI, which will be driven by the Magnificent Seven. It's worth considering that if Trump's attitude is genuinely to send the U.S. back to a regressive form of human labor manufacturing amid nationalist protectionism, he would be deeply misguided. Instead, the more rational outlook is that the U.S. administration will use this tariff ploy to re-open China-isolated free international trade, leading to a net tariff reduction internationally since Trump was elected. Any alternative course, such as one that retreats from globalization rather than reshapes it, would represent significant policy failure and could justifiably result in an electoral mandate for change.

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