December 26, 2023

Everyone from the government to everyday Americans seem to be spending like there’s no tomorrow. It’s led to annualized gross domestic product growth of 4.9% for the third quarter. There’s a problem though: the finances to back up the spending aren’t there. Once America’s capacity to spend runs dry, it’s possible the long-predicted recession could finally appear.

“Resilient” has been a common term to describe American consumers this year. We’re seeing it in inflation data. Core personal consumer expenditures (PCE) growth came in at 3.7% year-over-year for September, right in line with expectations. However, the month-over-month PCE including food and energy jumped 0.4%, the biggest jump in four months. That tells us Americans spent more than they took in.

This comes as the personal savings rate is at its lowest point since 2007. Also, the credit card default rate is at a 10-year high while outstanding balances are at all-time highs and climbing. It paints a picture of an American consumer stretched well beyond their means, though fighting to keep spending the same.

The federal government isn’t any inspiration for restraint either. It’s estimated to spend $6.3 trillion this fiscal year, second only to the $6.5 trillion spent in 2021. And total debt now exceeds GDP by 120%.

If the American consumer and government are stretched but show no signs of stopping, where are we heading? History offers a clue.

Elevated energy prices, inflationary problems, runaway government spending, patchy economic growth, and rising interest rates mark today. But they were hallmarks of the 1970s too. History may not repeat, but it often rhymes.

From 1966-1982, the Dow Jones Industrial Average went nowhere:

When adjusted for inflation, the index lost about 70% of its value:

Is such a thing possible now? In short, yes.