Two Economies
One Consumer, Two Consumer, Rich Consumer, Broke Consumer.
The Beacon · April 20, 2026
On Friday, we wrote the companion piece ahead of schedule. Three other writers had each moved the ball that week, and the conversation was ready for it. We promised the full chart pack would drop Sunday. A weekend hardware issue had other plans. Here it is Monday, with eighteen charts, the methodology, the sources, and where the framework sits today.
Executive Summary
The headline consumer data averages two populations that have almost nothing in common. One is spending down an asset base that keeps appreciating. The other is being repossessed. The aggregate numbers only make sense as statistics. As a description of any actual American household, they are fiction.
This Beacon gathers the eighteen charts we have been building to show that. It updates the January thread, folds in recent contributions from James at JB Macro, Jeff Horwich at the Minneapolis Fed, and Tim Pierotti at WealthVest, and closes with four threshold breaches that just printed in the underlying data.
The four breaches matter. So we lead with them.
The arithmetic of the "resilient consumer" works only because the top half of the distribution is spending a growing asset base and the bottom half is spending borrowed money it cannot repay. Neither is stable. They are only stable together, and only as long as asset prices keep rising and credit keeps extending. The labor data just told us which side of that pairing is cracking first.
In This Beacon
Why We Are Writing This Piece Again
We laid out the two-economies framework in January, first in a thread on the 15th, then on Substack the week after. The argument was straightforward: the aggregate consumer data is a weighted average of two populations with almost nothing in common, and treating it as a single number hides the risk.
The conversation has caught up. James at JB Macro traced the equity wealth channel in February and followed up this week, noting that strong equity performance is doing what wages aren’t. Jeff Horwich at the Minneapolis Fed worked through Moody’s, Bank of America, the NY Fed, and the BLS Consumer Expenditure Survey in March and concluded the K-shape debate is unresolved because every source stratifies by income instead of wealth. Tim Pierotti at WealthVest Macro published on the generational wealth transfer this week, the leg of the wealth story almost nobody has quantified.
Each found a channel. James found equity. Tim found inheritance. Horwich found the measurement gap that lets both hide. We would add a fourth piece they have left out: the credit-distress data on the other side of the same K, and the labor-flow data that is now confirming it in real time.
This is the chart-pack version. Eighteen figures, four threshold breaches, one framework. Where Friday was the narrative update, today is the receipts.
One frame to hold in your head as you read: the consumer is a lagging indicator pretending to be coincident. By the time retail sales roll, labor cracked 6-9 months prior, credit stress was visible in delinquency data, and confidence had been deteriorating for two quarters. The consumer does not predict. It validates. This Beacon is about what it is about to validate.
The Wealth Story
The top 10% of US households by wealth own 67% of all household net worth. The top 1% alone own more than the entire bottom 50% combined, by a factor of roughly twelve
This is not new. It has been true for a while. What is new is the degree to which asset prices over the last five years have done the top decile’s saving for them. The S&P 500 is near all-time highs. Home prices for the top tier of the market are at all-time highs. When your balance sheet grows 15% a year unrealized, you do not need to save 8% of your income. Your wealth is saving for you.
James’s JB Macro piece captured this cleanly. The US saving rate fell from 6.1% in Q1 2024 to 4.0% in February 2026 while the UK’s rose, despite both populations facing similar cost-of-living shocks and elevated rates. He estimates that without the drawdown, US nominal GDP would have been roughly 1.5% smaller than it is today. In his follow-up, James noted that the buffer for US households is equity wealth, which is pro-cyclical. Strong equity performance pushes the saving ratio down through the wealth-effect channel.
He is right. But the mechanism is narrower than it first appears, because the 4.0% aggregate is not distributed evenly.
The Savings Story
The consumer cycle runs the same way every time. We call it the Three-Stage Stress Sequence. Stage 1 is Savings Depletion: income growth slows but spending habits persist, so households draw down their buffer. Stage 2 is Credit Substitution: the buffer is exhausted, so credit takes its place. Stage 3 is Spending Collapse: credit dries up or becomes unaffordable, and the spending data finally rolls. Stage 1 is complete. Stage 2 is where we live now. Stage 3 is what the labor print just started to warn about.
The pandemic-era cushion is gone. The SF Fed put aggregate excess savings at roughly $2.1 trillion at peak in 2021. That pool was fully depleted by Q1 2024. Since then, households have been financing consumption by running the saving rate below its 2000-2019 baseline, a stretch now approaching three years.
That is the aggregate. The distributional picture is where the story sharpens.
The top 20% of US households still carries roughly $480 billion of positive excess savings, the residual of pandemic windfalls that mostly landed at the top of the distribution. Every cohort below the top 20% is now underwater versus the pre-pandemic trajectory, with the bottom 20% down $140 billion on its own. The bottom 80% is collectively $380 billion below where its savings trajectory would have been without the last four years. The pandemic did not create a universal cushion. It created a cushion for the top 20% and a liability for everyone else.
That asymmetry shows up in the saving rate by cohort. The top 10% saves roughly 18% of income and is actually saving more than it did pre-pandemic, because the wealth-effect cushion means they do not need the income flow to service their lifestyle. The middle 60% saves close to the aggregate, around 4.8%, down about 2 percentage points from where it ran before 2020. The bottom 60% saves approximately 1.2%, functionally the floor. You cannot save less than your grocery bill.
That distribution tells you that when the aggregate saving rate falls from 7% to 4%, it is not a story about the average American cutting back. It is a story about the top decile drawing on a wealth cushion that grew faster than their income, while the bottom 60% continues running at a subsistence saving rate because there is no slack left.
Look at the relationship between the saving rate and consumer credit growth. The saving rate sits at 4.0%, well below the 8.5% historical average. Consumer credit year-over-year growth has stabilized near 3.2%, but the level has marched higher every single month. What you are looking at is a consumer who has stopped saving and started borrowing to fund the same basket of purchases. Spending growth, at the margin, is being funded by the balance sheet, not the income statement.
The debt service ratio, required debt payments as a share of disposable income, is the receipt for this substitution. It has climbed to 11.3%, above our 10% stretched threshold. The driver is not new borrowing, it is the mechanical repricing of existing variable-rate debt at higher rates. Credit card APRs averaging 22.3% for balance-carriers mean even a flat balance generates a higher payment. More of every paycheck is pre-committed before discretionary spending gets a dollar.
The composition of that spending growth matters more than the total. And that composition, as the next section shows, is lopsided.
Horwich’s Minneapolis Fed piece worked through four major data sources (Moody’s, Bank of America, the NY Fed’s Economic Heterogeneity series, and the BLS Consumer Expenditure Survey) and concluded the K-shape story was ambiguous at best. Moody’s showed a steep K. The NY Fed showed almost none. The BLS CE showed no K, and in 2024 lower-income households actually posted the fastest spending growth of any quintile.
His closing observation is the one to focus on: “data on spending-by-wealth might provide a complementary view of the scale, and the shape, of any divergence in household spending.”
That is the whole answer. The K-shape debate he reviews is inconclusive because every source he examines stratifies by income. Income-stratified data will always look less bifurcated than wealth-stratified data, because wealth in the US is roughly three times more concentrated than income. The top 10% earn about 45% of income. The top 10% own 67% of wealth. Of course the two pictures do not match.
Stratify by balance sheet instead of paycheck and the bifurcation is not ambiguous. It is clean.
There is one more layer before the credit story, and it is the one almost nobody shows you.
Inflation does not hit every income cohort the same way. The top 20%, because a smaller share of its budget goes to shelter, food, and energy, has experienced effective inflation closer to 3.2%. The bottom 20%, which spends a much higher share on those three categories, has faced inflation closer to 6.1%. The spread is 280 basis points. When the headline CPI prints at 3.3% and the Fed declares victory, the top of the distribution has already seen the benefit, while the bottom is still paying rent increases and grocery bills that have not stopped climbing. Inflation is a regressive tax and it has been grinding for three years.
Combine a negative real income story for the bottom 60% with an above-aggregate inflation experience for that same cohort, and the credit data stops being surprising.
The Credit Story
While the top decile spends off asset appreciation, the bottom 60% is running out of runway. The credit data says so directly.
The aggregate auto delinquency rate across all commercial banks sits at 2.70%, well below the GFC peak of 8.2%. The headline looks contained. That is the whole trap. The aggregate averages prime and subprime together, and prime is fine. Subprime is not. Fitch’s Subprime Auto ABS Index puts 60+ day delinquency at 6.9%, the highest since the series began in 1994 and above the 2008-2009 peak. The distinction matters because the stress is not distributed evenly across the borrower pool. It is concentrated in the bottom quartile, the same cohort already visible in the credit-card and student-loan data.
Pull the comparison to the 2008 peak directly and it sharpens. Every subprime auto stress metric we track is now above its GFC peak. 60+ day delinquency: 6.9% now versus 5.2% at the 2008 peak. Repo rate: 3.8% now versus 2.9% then. Negative equity (borrowers who owe more than the car is worth): 24% now versus 22% then. The subprime auto market is in worse shape today than it was heading into the financial crisis, and that is with the S&P at record highs and the unemployment rate still under 5%.
Vehicle repossessions hit 1.73 million in 2024. The 2009 peak was 1.77 million. We are effectively at post-crisis levels in a non-crisis macro environment. Auto loans are a particularly clean signal because Americans generally pay the car loan last. It is the vehicle to the job. When repossessions rise, it means households have exhausted credit cards, skipped rent, maxed out buy-now-pay-later, and finally defaulted on the bill they try hardest to protect.
It gets more specific.
Across the consumer credit stack, delinquency rates are rising. Credit cards lead at 2.94%, up 33 basis points versus Q4 2019. Consumer loans broadly are at 2.62%, up 31 bps. Auto loan delinquencies at 2.70%. Mortgage delinquencies, where underwriting tightened materially after 2008, are at 1.78% and essentially flat versus pre-pandemic. Business loan delinquencies are also subdued at 1.34%, which is a clue. The stress is concentrated on the consumer, not the business, side of the balance sheet.
Relative to the Q4 2019 pre-pandemic baseline, every loan category is showing stress, but student loans dominate. New delinquency transitions on student loans are 691 basis points above 2019. Credit cards are 174 bps above. Auto is 79 bps above. Mortgages are 35 bps above. Basically flat.
The stress is building from the bottom of the household balance sheet up. Unsecured consumer credit is where it shows first because it is where the working-age cohort has the most exposure and the thinnest collateral.
Tim’s piece argues that “the money center banks all said basically the same thing about consumer spending and credit quality, which is that they see no slowdown and no signs of emerging credit weakness.” That is accurate for bank balance sheets. Prime consumer portfolios are fine. The weakness does not show up in JPMorgan’s 10-Q because JPMorgan does not carry subprime auto paper or the bulk of the student loan book. It shows up in Experian, Cox Automotive, and the NY Fed Consumer Credit Panel. Different data, same population.
The Labor Story
You would expect a labor market signal to precede credit stress of this magnitude. It is there. You just have to look underneath the BLS headline. And as of the data we pulled this weekend, it is no longer quiet.
The quits rate just broke through 2.0%. JOLTS February print: 1.9%, down from 2.0% a year ago. This is the first time this cycle we have been below our 2.0% pre-recessionary threshold. The quits rate is the cleanest read on worker confidence there is. Workers quit when they believe they can find a better job. They stay when they are scared. They just stopped quitting.
Long-term unemployed share at 25.2%. Above our 22% structural fragility threshold, up 4.2 percentage points in twelve months. The pool of people who have been unemployed 27 weeks or longer is now a quarter of the unemployed population. These are the workers the labor market has the hardest time reabsorbing. They are also, disproportionately, the bottom-60% cohort whose credit data we just walked through.
The sharpest read on this dynamic comes from ADP’s Main Street Macro piece last week. Turnover at employers with fewer than 50 people fell to 3.9% in March, the lowest reading in the nine years ADP has tracked it. The last-three-year baseline for all private employers has run near 4.7%. A separation rate that low is not a sign of health. It is the signature of workers who have concluded there is nowhere better to go.
Two things matter here. First, the composition. Nela Richardson notes that in February and March, small employers accounted for nearly all net private-sector job gains, even as overall turnover collapsed. That is a bifurcation inside the labor market: stasis at the worker level, dynamism concentrated at the one segment of employers most vulnerable to macro shocks. Second, the direction. Low turnover supports spending in the short run because paychecks keep flowing. Over time it starves the labor market of the reallocation that drives wage growth and productivity. The short-run comfort is exactly what sets up the long-run problem.
The long-term unemployment share is the slow-moving part of the labor data. It does not spike on a single jobs report. It climbs. And it has been climbing for eighteen months. A worker who has been unemployed for six months is statistically unlikely to return to the labor force at prior wages. A growing share of long-term unemployed is a growing share of the labor market being written off, quietly, in the background of headline unemployment numbers that still read fine.
And the composition of that long-term unemployment is not random. Workers 55 and older carry a 31% long-term unemployment share, the highest of any demographic cohort. When older workers lose a job, they usually do not get another one at the same wage. That 31% figure is not a queue. It is a cliff. Black workers, separately, carry a 7.5% U-3 rate and a 28% long-term share, both among the highest in the data. The headline unemployment rate of 4% averages all of this together into a number that, by cohort, nobody is actually experiencing.
And then the income math.
Aggregate weekly payrolls, the product of employment times hours times wages, is growing +3.7% nominal year-over-year. Real, after deflating by CPI at +3.3%, that is +0.4%. Near zero. The tailwind that funded consumer spending through 2023 and 2024 is effectively gone. The top quintile does not care because the top quintile’s income does not come primarily from wages. The bottom 60% does care, because wages are close to the whole thing.
Average weekly hours are flat at 34.2. Temp help payrolls are down 2.1% year-over-year, approaching the -3% threshold we watch as a recession precursor. Initial claims four-week moving average sits at 209,750, still below the 230,000 stress level, but continuing claims are sticky at 1.82 million.
And then the revisions. The January 2026 benchmark revisions subtracted 898,000 jobs from the 2025 totals. The average monthly gain for 2025, after revisions, was just 15,000. Not the 150,000-to-200,000 that was reported in real time. Fifteen thousand. That is not a labor market growing. That is a labor market that was not growing and nobody knew it until the benchmark caught up to the truth. The current month’s print, whatever it says, has to be read through that lens now. The prior year was softer than it looked, and the current trend is softer still.
Horwich notes, correctly, that the K-shape in spending data is inconsistent across sources. But the labor market tells us something the spending data cannot. The capacity of the bottom cohort to keep spending is being eroded right now, even if the current month’s card-swipe data has not fully reflected it.
This is what the Labor Fragility Index (LFI) is built to measure: z-scores of long-term unemployment share, the inverse of the quits rate, and the inverse of the hires-to-quits ratio. All three components moved the wrong way in the February print. The LFI is rising. The credit data has been screaming for a year. The labor data is now confirming it.
Which brings us to the cleanest signal in the pack.
The Credit-Labor Gap
We define the Credit-Labor Gap as z(HY OAS) - z(LFI). It answers a single question: does the credit market agree with the labor market about how fragile the economy is?
Right now, it does not.
High-yield option-adjusted spreads closed April 16 at 286 bps, through our 300 bps complacency threshold. Spreads tightened 116 bps over the past twelve months despite what just happened underneath. The Labor Fragility Index moved in the opposite direction over the same period.
When we compute the gap, the result is -1.68. Our threshold for “credit ignoring fundamentals” is -1.0. We are 68 basis points of z-score past that.
One of these two markets is wrong. Credit is pricing a soft landing that the labor data no longer supports. If the labor data is right, credit will reprice. If credit is right, the labor data has to reverse sharply, which means quits have to rise, long-term unemployment has to fall, and small-firm employment has to recover, all simultaneously and in the next print or two. We can see the path for credit to be right. We do not see the data.
This is the sibling signal to the Credit-Growth Gap we introduced on Friday. Same mechanic, different pair. Credit spreads have tightened into a macro environment the rest of the data is not confirming. Spread-widening when the correction comes will be faster than the tightening was.
The Spending Story
The macro cohort data flows directly into the consumer tape, and the consumer tape confirms the bifurcation.
Luxury retail (Tapestry, LVMH, Ferrari) is up 17% since January 2022 on an indexed basis. Dollar stores (Dollar General, Dollar Tree) are down 9% over the same period. The two lines have diverged monotonically. Ferrari just raised guidance. Dollar General just cut. Walmart is gaining wallet share from Target because middle-income consumers are trading down. LVMH’s US revenue is growing. Dollar Tree’s traffic is breaking lower.
The aggregate PCE number of +2.6% real year-over-year masks this. Real PCE at the top quintile is probably running +4% or higher. Real PCE at the bottom quintile is flat to negative. The average describes an economy that does not exist for most participants.
Under the PCE hood, the composition is already rolling. Durable goods spending is contracting at -1.8% YoY. Services are still growing at +2.4%. Durables turn first at cycle inflections because consumers defer big-ticket purchases before they cut groceries. You do not need a new car this quarter. You do need to eat. Durables negative while services positive is the classic late-cycle handoff, and the spread has now been widening for two quarters.
Confidence is the part of the picture that rhymes with the spending composition. UMich sentiment sits at 57.3, deep in weak territory but off its December low of 53. The Conference Board’s Expectations Index, which is the sharper recession signal historically, has collapsed to 65.1. Our threshold is 80. The CB Expectations Index dropping below 80 has preceded every recession since 1970 by 6 to 12 months. We are 15 points past it. Present conditions still look okay. Forward expectations are not.
The Inheritance Story
And now to Tim’s point, which is the most important one nobody has been properly measuring.
Cerulli estimates roughly $2 trillion a year is transferring between generations right now. That is not a future event. It is a present-tense income stream for a specific cohort of younger Americans.
Tim’s specific contribution, and it is a real one, is quantifying this channel’s impact on housing.
Per Redfin, up to 40% of first-time homebuyers used a gift or inheritance to make the down payment. Zelman puts the figure for all buyers at roughly 30%. Tim’s back-of-envelope math suggests down-payment assistance alone adds about 50 basis points to discretionary spending, because the income that would have gone to saving for the down payment now goes to consumption instead.
That is the channel James did not reach and Horwich flagged but could not measure. It is not just top-decile equity wealth funding consumption directly. It is also intergenerational transfer. Wealth migrating down a generation, landing disproportionately on Millennials and Gen X, and converting into home purchases and consumption that income-stratified data has no way to attribute to its source.
Tim’s framing is sharper than ours would be: “betting against the US consumer is like betting on the Jets to beat the Patriots. It almost never works.” He is right on the aggregate, and for the same reason James is right on the saving rate. The top half of the distribution is subsidizing the headline.
But his essay stops one step short of the full picture. Tim is describing the wealth-advantaged subset of the “bottom 60% by income,” the Millennials with parents who own a home and a 401(k). That cohort is real and growing. What his piece does not address is the rest of that bottom 60%. The cohort without wealth to inherit, that is funding consumption off credit instead of capital, and whose repo volume just matched post-GFC levels.
The two cohorts look identical on an income chart. They look very different on a balance sheet. The aggregate consumer data averages them together and calls it resilience.
The Housing Bridge
Housing mirrors the rest of the story and lets you see the two economies side by side in a single asset class. Luxury homes (top 10% of the price distribution) are up 2.4% year-over-year with an average 45 days on market. Entry-level homes are down 8.6% year-over-year with 95 days on market. The luxury tier is running 50 days faster through inventory than the bottom tier, and the price direction is opposite. These are not two ends of the same market. They are two markets.
The mechanism is straightforward. Top-tier buyers are cash-rich, often funding purchases from equity portfolios or inheritance transfers. Bottom-tier buyers are rate-sensitive and credit-constrained. The 30-year mortgage rate at 6.3% effectively locks out the bottom half of the first-time buyer market, while the top half does not feel it. The frozen equilibrium our Housing pillar describes is frozen more at the bottom than the top.
This is the channel that connects the K-shape to the real economy with the shortest lag. If the top-tier housing market rolls over, the wealth-effect channel James identified stops working. The saving rate does not just stabilize, it has to rise, because the top decile’s asset cushion stops compounding. And the aggregate PCE number that has been running +2.6% real falls hard, because the top quintile accounts for roughly 40% of total consumer spending.
Synthesis
James saw the equity wealth channel. Horwich saw the measurement gap. Tim saw the generational transfer channel. We would add the credit-distress data on the other side of the same K, and the labor-flow data that is now confirming it in real time.
The common feature across the first three: all are describing the same population. Wealth-advantaged households whose spending is decoupled from their current income. Whether that wealth arrives via equity gains, home appreciation, inheritance, or expected inheritance is secondary. The common feature is that current income is not the binding constraint.
Simultaneously, the bottom 60% of households by wealth are showing the credit distress you would expect in a mid-recession. Repo volume matching post-GFC levels. Student loan delinquency transitions seven times pre-pandemic levels. Quits rate through 2.0%. Long-term unemployment share through 22%. These households cannot quit spending entirely because rent and groceries are not optional, but they also have no slack left to absorb another shock.
Both things are the same thing. The aggregate looks “resilient” because the top half is spending a growing asset base and the bottom half is spending borrowed money it is increasingly unable to repay. Neither is a stable state, but they are stable together as long as asset prices keep rising and the credit system keeps extending.
The labor data just moved. Not decisively, but it moved. Quits through threshold. LT unemployed through threshold. Real aggregate payrolls near zero. The Credit-Labor Gap at -1.68.
One wildcard sits on top of all of this: the tariff pass-through. Businesses absorbed roughly 80% of tariff costs through 2025, which protected the CPI print but compressed corporate margins. That absorption is projected to shrink to roughly 20% as the effective tariff rate, now at 11.8% (Yale Budget Lab, April 6), works through pricing decisions later this year. The arithmetic flips from margin pressure to price pressure, and it lands disproportionately on the cohort with the least room to absorb it. A bottom-60% consumer already running a 1.2% saving rate and a 6.1% effective inflation rate does not have the balance sheet to eat a second leg of goods inflation. That is the scenario where Stage 2 goes straight into Stage 3 without waiting.
If the Fed had a labor mandate free of political crosswinds, this is the data print they would start cutting into. Whether they do is a separate question.
The Framework Behind The Charts
For readers new to the framework, this is Pillar 5 (Consumer) of our Diagnostic Dozen, integrated with Pillar 1 (Labor) and Pillar 9 (Financial). The full Consumer post is here.
The Consumer Conditions Index (CCI) is a seven-component composite. Each component is z-scored against its own history, then weighted by its measured contribution to forward PCE. The components are real PCE year-over-year, the personal saving rate, retail sales control, credit card delinquency (inverted), UMich sentiment, real disposable personal income year-over-year, and the household debt service ratio (inverted). Spending momentum and the saving rate do most of the work. Sentiment and the debt service ratio sit at the bottom of the stack because neither leads forward PCE cleanly enough to give them more room.
The Labor Fragility Index (LFI) is built from three inputs: the z-scored share of long-term unemployed, the inverse of the quits rate, and the inverse of the hires-to-quits ratio. The three are weighted roughly in balance, with a modest lean toward the flow measures.
The Credit-Labor Gap takes a definitional shape:
CLG = z(HY OAS) - z(LFI)
A difference of two z-scores, not an optimized composite. When the number goes materially negative, credit is pricing a softer labor market than the labor data describes.
Charts in this pack were built from the Lighthouse Master Database (~2,100 series, refreshed daily from FRED, BLS, BEA, NY Fed, OFR, Yahoo Finance, AAII, Zillow, and TradingView). Wealth-distribution data comes from the Fed’s Distributional Financial Accounts. Household credit data comes from the NY Fed’s Quarterly Household Debt and Credit Report. Subprime auto data comes from Fitch Ratings’ ABS tracker. Repossession data comes from Cox Automotive. Luxury and discount retail splits come from company filings and Yahoo Finance price data.
The component architecture is public. The exact weights, z-score windows, and signal-cleanup rules for every composite are proprietary to paid subscribers.
What Would Change Our Mind
This framework has clear invalidation criteria.
The wealth-effect channel dies when asset prices stop rising. If the S&P 500 breaks its 200-day moving average decisively, and Zillow’s top-tier home price index goes negative year-over-year, the top decile’s wealth cushion stops compounding. James’s nominal GDP math runs in reverse. This is a quarters-level event when it happens, not weeks.
The credit-distress channel inverts if small-firm employment turns up. If ADP shows small-business hiring recovering (not just stabilizing), the squeeze on the bottom 60% eases, delinquencies peak, and the two-economies frame loses half its force.
The transfer channel weakens if equity markets and housing both correct at the same time. Tim’s +50 bp discretionary spending contribution assumes the wealth being transferred is broadly stable. In a simultaneous equity-plus-housing drawdown, the transfer intensity falls.
The labor signal reverses if quits print back above 2.0% and LT unemployed share falls back below 22% in the next JOLTS and household survey releases. A single month’s move is not a trend. We need confirmation.
The Credit-Labor Gap closes if HY OAS widens meaningfully above 350 bps within the next 30 days. That would tell us credit has caught up to the labor signal, and the gap has closed the honest way.
If all three consumer channels unwind simultaneously, the “resilient consumer” becomes the “sudden consumer” in a hurry, because each of these channels is currently doing the work that weak real income growth is not.
The Bottom Line
The consumer cannot quit for the same reason risk assets cannot quit. Asset prices are doing the work that wages are not. Tim is right that betting against the aggregate is betting on the Jets. We would add: the game the Jets are actually playing is two different games at once, and only one of them is being scored.
The 4.0% saving rate is not a number about the American consumer. It is the arithmetic mean of a top decile saving 18% off a mountain of appreciating wealth, and a bottom 60% saving 1.2% because 1.2% is the floor. An average with that much underlying variance is not a data point. It is camouflage.
The consumer is the margin. Real PCE is growing at +2.6%, contributing roughly +1.4 percentage points to GDP. If consumer spending decelerates from +2.6% to +1.5%, the PCE contribution to GDP falls by roughly 0.7 points and GDP drops from +2.5% toward +2.0%. If consumer stagnates at +0.5%, GDP falls to +1.0%. The 68% of GDP that is consumer spending is the difference between a soft landing and a recession, and that 68% is already running on a funding mix that has shifted from income to credit.
What changed this week is that the labor data started to move. Quits below 2.0%. Long-term unemployment above 22%. Real aggregate payrolls near zero. Credit-Labor Gap at -1.68.
James, Tim, and Horwich have each moved the ball this spring. What we would add, and what the January piece was already pointing at, is that the headline is not hiding the distribution by accident. It is hiding it because we stopped publishing the distribution decades ago. The BEA does not release a saving rate by wealth decile. The BLS does not break spending out by net worth. We built the Diagnostic Dozen, and specifically the Consumer Conditions Index and the Labor Fragility Index, to put that distribution back into view.
The consumer does not predict. It validates. What it is about to validate is what labor, credit, and confidence have been saying for months. The two economies have been there the whole time. Now there are charts.
That’s our view from the Watch. We’ll keep the light on...
Bob Sheehan, CFA, CMT
Founder & Chief Investment Officer
Lighthouse Macro | Research | @LHMacro