The Consumer Sentiment vs. Consumer Spending Puzzle

Episode Summary

Executive Summary: The episode examines why U.S. consumer spending remains strong even as consumer sentiment is near historic lows. It argues that the economy is increasingly top-heavy: wealthy households, insulated by strong wages, rising home and stock values, are driving spending while lower-income households lag. This creates a resilient but fragile, K-shaped economy vulnerable to a market shock.

Main Topics: Consumer sentiment and spending are diverging (Priority: 5/5): The show opens with the unusual split between low consumer confidence and still-strong spending, which historically have moved together. This divergence is especially striking compared with the pre-COVID period. Limits and strengths of survey data (Priority: 4/5): Consumer sentiment and expenditure surveys are imperfect because they rely on self-reporting and memory, especially missing high-end spending. Still, they clearly show the mismatch that prompted the analysis. Credit card data reveals who is driving spending (Priority: 5/5): Using Federal Reserve access to anonymized bank card data, economist Deiren Patkey finds that high-income households account for a disproportionate and growing share of spending. Wealthy households are insulated and empowered by asset gains (Priority: 5/5): High-income consumers are less affected by inflation, tariffs, and interest rates, and their spending is supported by strong wages and large gains in housing and stock wealth. Economic resilience may mask vulnerability (Priority: 5/5): Because spending is increasingly concentrated at the top, the economy may look strong while actually being dependent on financial markets and upper-income households remaining confident and wealthy. The economy is described as K-shaped and top-heavy (Priority: 4/5): Peter Atwater’s metaphor captures a split economy in which affluent households move ahead while lower-income households fall further behind, creating a misleading sense of broad prosperity. Stock market concentration creates fragility (Priority: 4/5): The episode emphasizes that recent market gains are being driven by a small number of giant tech firms, making overall consumption and confidence more exposed to a market downturn.

Key Arguments: Consumer spending remains strong despite low sentiment because wealthy households are still spending heavily. Survey-based measures of sentiment and spending have flaws, but alternative credit-card data confirms the divergence. The top 20% of households are responsible for more than half of credit card spending in the Fed data. High-income households’ spending has grown much faster than lower-income households’ spending over the past decade. Rising home and stock values, plus strong wage growth at the top, are supporting affluent consumers’ spending power. The economy is increasingly vulnerable because aggregate spending depends on a relatively small, wealthy segment of households. A shock to stock markets could quickly weaken consumer spending because top-income households are now carrying so much of it. The current economy is best understood as K-shaped: gains accrue to those at the top while those at the bottom fall behind.

Data Points: Consumer spending share of GDP: More than two-thirds; about 70% - Consumer spending is described as the dominant component of U.S. economic activity. Credit card spending in May 2025: About $300 billion - Total monthly spending observed in the Federal Reserve credit-card data. Lowest income bracket monthly credit card spending: About $26-27 billion - Households earning roughly $0 to $39,000 per year. Highest income bracket monthly credit card spending: About $175 billion - Households at the top of the income distribution. Share of spending by top income quintile: Over half - The wealthiest 20% of Americans account for more than half of credit card spending in the data. High-income spending growth over 10 years: 86% more, inflation-adjusted - Growth in spending among the wealthiest households compared with a decade earlier. Low-income spending growth over 10 years: 50% more - Inflation-adjusted spending growth among the lowest-income households. Credit card market coverage: About 80% of all credit card balances - Share of balances covered by Federal Reserve access to bank data after Dodd-Frank. Retail spending captured by credit cards: About half - Approximate portion of retail spending that appears in the credit-card data. Stock market concentration: A few companies, including the Magnificent Seven - Recent market growth is described as being driven largely by major tech firms tied to AI. Example of car pricing: Average car price is $50,000 - Used to illustrate the bifurcated economy and growth in high-end consumption. Luxury car/vehicle example: Twice as many car models over $100,000 than under $30,000 - Illustrates the market’s tilt toward affluent buyers.

Pivotal Quotes: "The divergence has not been so sharp as it has been since the COVID pandemic." — Deiren Patkey: Explaining how unusual the gap is between consumer sentiment and consumer spending. "The wealthiest consumers are spending billions and billions more than they, as wealthy people, used to spend in a month." — Deiren Patkey: Summarizing the main finding from the Fed credit-card data. "It is a top-heavy Jenga Tower." — Peter Atwater: Metaphor for an economy where strength is concentrated at the top and therefore fragile.

Implications: The economy may be less broadly healthy than it appears. If spending depends heavily on affluent households and rising asset prices, a stock-market shock could quickly weaken growth and expose underlying inequality.