The myth of the resilient consumer

The 'resilient' consumer
There is a mythic presence in the market that keeps the whole contraption working, one never-yielding character that makes the entire Rube Goldberg machine work. I am speaking of the proverbial resilient consumer.

If you've hung around the markets for any time at all, you've surely heard people talking about the resilient consumer. It's a marvel how seemingly time and time again this paragon of consumption appears on the scene to perform its magic. The resilient consumer is indefatigable. 

PayPal's earnings were bolstered by a resilient consumer, Reuters reported (the story our Melinda Huspen wrote was more circumspect). Consumers are miserable, but resilient, Jill Schlesinger wrote just this week in the San Jose Mercury News. "It's been amazing how resilient consumer spending has been," Bankrate's Ted Rossman told CBS News. All the major banks pointed to consumer resiliency in their recent earnings call.  Women's Wear Daily boldly proclaimed that the resilient consumer would be the key to avoiding a recession.

And that's just the past few weeks. The problem with the belief in the resilient consumer is that it's a myth. What keeps consumers spending isn't some can-do, spirited resiliency. What keeps consumers spending is credit. We all know that incomes for most working Americans have not kept up with inflation over the past half-century. That cash salary has not been enough to maintain a standard of living and the gap has been filled with credit. Total consumer debt today stands around $18 trillion. Credit-card balances have skyrocketed since the pandemic-induced recession. The degree to which consumers are taking on more credit is the real driver of the economy, not some ballyhooed resiliency and determination to spend.

I'm not bringing this all up to make some political point. I'm bringing it up because if you want a good sense of where the economy is headed, you need to keep track of trends in consumer credit. One report that lays out those trends is the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending, published four times a year. It is what it sounds like. Fed researchers ask senior loan officers a bunch of questions and collate the answers. It's a big report with a lot of different topics, but I was looking at the demand for consumer loans. 

In eight of the past ten quarters, more banks said demand for credit card loans has been falling than have said it's rising. In nine of the past ten quarters, more banks said demand for auto loans has been falling than said it's rising. Then I went and looked back: For nearly three full years before the crash of Lehman Brothers and the financial crisis of 2008, more banks were reporting that there was weaker demand for consumer loans than were reporting rising demand.

My point is I don't think the consumer really is all that resilient. And I'll tell you this, I paid $4.40 a gallon for gas over the weekend, and I'm wondering what number nationwide would push the economy into a tailspin. $5? $6?

More layoffs
Of course, one thing that can destroy even the most resilient of consumers is a layoff. Coinbase on Tuesday became the latest big name to rip off a big round of layoffs, our Carter Pape reported. The company said it was cutting 14% of its staff – about 700 people – and blamed a crypto downturn and the advancement of AI. The company's revenue was down 22% in the fourth quarter (which highlights what I was talking about yesterday, these crypto firms desperately need to be able to offer their customers something besides crypto.) It will report first-quarter earnings on Thursday.

Former Coinbase employees may not be the only ones looking for work. PayPal is reportedly looking to cut 20% of its staff over the next few years, as Melinda reported today. The company wouldn't address that on its conference call, saying only that it is looking to "eliminate duplication" as it restructures. 

And while on the surface the jobs market seems okay – Friday will bring the April jobs report, and I've seen estimates of 80,000 for the headline number (Bank of America), or even 135,000 (Jefferies). But those numbers mask something unemployed already know: the majority of the new hires are people who are already working. "Unemployment is still fairly low by historical standards, but it's gotten harder and harder to find a job if you don't already have one," Ryan Nunn at Yale's Budget Lab research center wrote. The low unemployment rate, he said, has understated hiring weakness since 2024.

Which is just about ten quarters, or the time frame when loan officers have been reporting less demand for loans.