The US is unlikely to drop into recession
With the job market softening and economists hammering on about the negative consequences of tariffs, some people expect the US economy to slow down and eventually drop into recession. My personal view is one where the stagflationary impulse from the tariffs will slow the economy down and increase inflation. Still, the US is unlikely to drop into recession in 2025 or even 2026. A new study by the Boston Fed shows one key reason why this may be so.
They wanted to find out why consumer spending has not slowed in the aftermath of the 2022 inflation spike and rising interest rates. They show that low-income households did indeed feel the pinch from the higher cost of living. Lacking any meaningful savings, they made up for the shortfall by using buy-now-pay-later schemes and – more commonly – racking up credit card debt.
High-income households, meanwhile, kept on spending at almost unchanged growth rates thanks to excess savings from the pandemic years and low credit card balances overall. These high-income households masked an overall deterioration in consumer spending and prevented the US from dropping into a recession in 2022 or 2023.
Credit card debt in 2022, in real terms, across households
Source: Boston Fed
All of this is quite well known among professional investors and economists, but where it becomes important is what the above charts mean for 2025 and 2026.
First, notice that in real terms, credit card debt for high-income households is still below 2019 levels. Rich people in the US still have the ability to add to their household debt. Middle-income households, meanwhile, already have higher credit card debt than in 2019, so for them, the air is getting increasingly thin. And low-income households have higher credit card debt than in 2019 but lower than in 2023.
What this means is that in another cost-of-living squeeze from tariffs and a softer job market, high-income households again have enough firepower to bail out the US economy and continue their consumption as if nothing really happened. Meanwhile, middle America and poor Americans will once again have to cut back their consumption or increase their debt to make ends meet. That is the same pattern as in 2022 and 2023.
But second, remember that the US passed a massive budget that cuts taxes for the richest 10% to 20% of the population. In 2026 and even more in 2027, high-income households will feel the benefits of these measures at the very least by not having to spend more on taxes and in many cases by effectively paying less. And that is probably worth a couple of bottles of (American?) champagne to celebrate.
I fully expect that while the living standards for low- and middle-income households in the US will deteriorate, we won’t see a meaningful drop in aggregate consumption because of high-income households. And without a meaningful slowdown in US consumption, it is hard to see a US recession anytime soon.
I broadly concur with your view. However, the wild card is the markets (and broadly asset prices). High-income households are very exposed there, so any sustained drops in (equity) markets could have an outsized effect on the US economy.
You know, as someone who is not wealthy but is a firmly middle class long-time professional who has been unable to find work for two and a half long years now, and is wrapping up a long career by sliding into destitution and homelessness, and has watched dozens of others ahead of me on that trajectory in the last two years with hundreds more who I personally know in the same precarious situation, I'm far beyond tired of people refusing to acknowledge the truth:
America doesn't have "an economy". We have several side-by-side economies:
1.) An economy for the upper quintile, decile, or smaller, which is currently booming as it has since 1980;
2.) Another economy for the rest of us, right alongside it, which has been mired in a major substantive, if not technical, recession for at least two years now.
Career professionals, if they can find job opportunities at all, are now regularly offered lower pay than the same jobs paid 25 years ago, while food and bills cost four times what they did then. Too many people have already slid from white collar careers into actual homelessness in just the last two years. And I've heard of too many directly related suicides.
LinkedIn is more full than I've ever seen it of people, formerly able to support themselves, lost in despair and hopelessness. You can't even get a job at McDonalds or Home Depot.
Meanwhile, the rich are doing well, so everybody pretends it's not happening.
And we've developed a new rigid caste that ensures you can no longer move from one of the lower economies to the upper. Remember when America used to be called"The Land Of Opportunity"? Have you noticed you haven't heard that phrase in a while?
And after two long years of this, we get to sit and watch people still continue to publish pieces about what good shape we're in.
Wait until these chickens come home to roost. I just don't believe you can put this many skilled people out of work for this long without consequences, no matter how well the wealthy are coasting above it all.
The future is terrifying to many of us who spent most of our lives believing we had, if not job security, at least opportunity. And we've been brutally disabused of that misconception.
But the inevitable fallout from this still won't touch the top economic strata, so people will still write pieces about what good shape the US is in.