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.
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.
In the long-term, bringing manufacturing back to this country will result in higher wages and higher quality products which will permeate the economy!