The "Best" Bicentennial Episode

Episode Summary

Executive Summary: On the 200th episode of Inside Economics, the hosts and guest Wayne Best examined the U.S. consumer through the lens of income, wealth, and card-spending data. The discussion highlighted a split economy: affluent households are driving spending while lower-income households remain under pressure. They also explored how tariffs, immigration, regulation, and market-driven wealth effects could shape inflation, spending, and recession risk in 2025.

Main Topics: 200th episode milestone and opening banter (Priority: 2/5): The hosts celebrated the podcast’s 200th standard episode and discussed employee anniversary gifts and long tenure at Moody’s, setting a reflective tone for the conversation. The consumer as the engine of the economy (Priority: 5/5): Mark Zandi framed U.S. growth as consumer-led, while Wayne Best described overall consumer health as decent but uneven across income groups. Tale of two consumers: income bifurcation (Priority: 5/5): Best explained that middle-income households are cautious and lower-income households remain strained, while upper-income households continue to spend, especially on travel and experiences. Visa spending momentum index and spending data (Priority: 4/5): Best detailed Visa’s spending momentum index, a timely diffusion index based on card transactions across households, regions, and countries, showing weaker breadth but stronger spending among those still active. Wealth effects and affluent spending (Priority: 5/5): The discussion focused on how rising stock and home values are supporting high-income spending, especially among older and retired households, and how a reversal could weaken the economy quickly. Credit stress, delinquencies, and minimum payments (Priority: 4/5): The group examined improving but still elevated credit stress at the lower end, plus an emerging concern about affluent consumers making only minimum payments on cards. Policy uncertainty: tariffs, immigration, regulation (Priority: 5/5): The panel debated how Trump-era policy changes could affect inflation, labor supply, business investment, and consumer behavior, with uncertainty itself seen as a potential drag on growth.

Key Arguments: U.S. consumer spending remains solid overall, but the source of growth is concentrated in higher-income households rather than broadly shared across the income distribution. Middle-income households are spending more cautiously, shifting from credit cards toward debit cards due to uncertainty, still-elevated inflation, and high interest rates. Lower-income households continue to face significant stress, though some balance-sheet improvement has occurred through higher home equity and retirement assets. Visa’s spending momentum index is below 100, implying fewer people are spending more than last year, even though aggregate spending still rises because active spenders are spending much more. The affluent are increasingly important to consumer growth because wealth gains from stocks and housing have boosted spending capacity and reduced precautionary saving. There is a new area of concern among affluent cardholders: rising minimum-payment shares and elevated serious delinquency balances suggest stress in a segment usually viewed as healthy. Policy uncertainty around tariffs, immigration, and regulation may freeze hiring, investment, and spending decisions even before the policies are fully implemented. If asset prices weaken, reverse wealth effects could quickly dampen spending because the high end of the income distribution is carrying a disproportionate share of consumption. Lower delinquencies and slower debt growth suggest some improvement for lower-income borrowers, but not enough to signal broad relief yet.

Data Points: Inside Economics episode count: 200th standard weekly episode - Milestone celebrated at the start of the podcast 2024 real consumer spending growth: 2.7% - Wayne Best’s projection for full-year 2024 real spending growth 2025 real consumer spending growth forecast: 2.3% - Best’s projection for 2025, implying a modest slowdown Visa spending momentum index (U.S.): 95.8 - December reading; below 100 indicates fewer people spending more than a year earlier Card-spending index scale: 200 if up, 100 if flat, 0 if down - Best explained the diffusion-index construction of the SMI U.S. card-spending index coverage: 100 countries - Visa has expanded the index globally Middle-income behavior: More debit-card usage, less credit usage - Best described caution among middle-income households Lower-income excess savings: Used up all excess savings - Best said lower-income households have exhausted pandemic-era cushions Bottom-20% household net worth change: Up about 43% since Q4 2019 - Best noted wealth growth even among lower-income households, though from a small base Housing prices for some lower-income households: About 50% increase - Best attributed part of bottom-group wealth gains to home equity appreciation 401(k) hardship withdrawals: Continued to go up - Best cited rising hardship withdrawals as a sign of stress 20th percentile to 80th percentile wealth gains: About 40% - Best said middle-income households saw sizable wealth gains since pre-COVID Top-20% minimum payment share: About 16.8% to 17% - Best said the share of affluent cardholders paying only the minimum is at an all-time high Seriously delinquent balances: About 0.6% of overall balances - Best said 90+ day delinquency on balances is near an all-time high Fed funds rate cut: 100 basis points - Mark noted the Fed has lowered rates, but credit card APRs have not fallen much Card APRs: About 22.9% to 23.9% - Best said headline card APRs fell only modestly after the Fed’s rate cuts University of Michigan tariff perception: 62% vs 19% - 62% think tariffs are bad for the economy; 19% think higher tariffs are good Michigan inflation expectations under tariff views: 4.5% expected inflation vs outright deflation - Tariff skeptics expect much higher inflation than tariff supporters Existing home sales: 4.06 million - Chris cited this as a headwind for consumer-linked spending; he referenced the annual figure Home price growth examples: 4.6% and 5.4% YoY - Wayne compared AEI Housing Center and Redfin home-price data Business class seat sales: About 88% to 90% sold - Wayne used this as evidence of continued premium travel demand Baby boomers’ share of wealth: 52% - Wayne said boomers now hold a majority of total wealth People turning 65: Roughly 11,600 per day - Best cited aging demographics as a key macro force Tariff proposal: 25% on Mexico and Canada - Best discussed uncertainty around proposed tariff rates Mexico avocado share: 90% to 95% - Used to illustrate why broad tariffs could face carve-outs Foreign-exchange / DXY implication: Strong dollar forecast - Chris said a strong dollar could affect travel and countries pegged to the dollar

Pivotal Quotes: "the tale of two consumers and the tale of two halves" — Wayne Best: Describing a split consumer economy by income group "the affluent are spending more money" — Wayne Best: Explaining why overall spending can stay strong even when the spending momentum index is below 100 "people don't know what to expect. So not so much that people are necessarily going to change their behavior right away, but they're going to just not do anything" — Marissa Di Natale: On how policy uncertainty can freeze investment, hiring, and spending

Implications: The economy may keep growing, but consumer strength is fragile and uneven. High-income spending is doing the heavy lifting, so a reversal in asset prices or sharper policy uncertainty could slow growth fast, while lower-income stress remains a credit-risk concern.