Sigh, I feel like the lost bear in the woods.
There is an underlying economic reality that the “K” shaped economy is something new to the United States where the wealthiest 5% are living life in a different version of the United States from the lowest 60% or even 70% of the rest of America.
As James Gordon Steele wrote in the essay, October 29, 1929: Black Tuesday, Stock Market Crash:
But sometimes Wall Street separates from the underlying economy and loses touch with economic reality.
The question now becomes is are we there at that point in history again?
Some on Wall Street have been brave enough to say this in the open, like Alli McCartney of UBS Private Wealth Management on CNBC this past Wednesday, July 16th:
So is this disconnect real?
If one adheres to the K shaped economic theory where the upper 5-20% are spending enough to mask the weakness of the lowest 2/3rds of the American public, then yes.
But is there evidence to support this, especially when one looks at more than one report promoted on financial television and looks at much broader swaths of economic data?
Let us dive into the data together so my readers can draw their own conclusions.
I. The Credit Unions Detect a Change in Spending Habits
The following news story is anecdotal at best, but here is a great illustration of consumer stress via the Credit Union Times from the Friday, July 18th edition:
Credit Union Members Tap Brakes on Spending
Excerpted:
A large swath of credit union members have been slowing their spending this year, according to a report Thursday from the nation’s largest payments CUSO.
Velera’s Payments Index showed that spending in June rose 0.9% by credit card and 3.6% by debit card from a year earlier. Velera’s pool of credit cards showed its first decline of its total balance in at least five years.
That is an interesting development but what this excerpt from the article was even more telling:
“As economic headwinds and tariff-related price pressures ripple through the economy, we’re starting to see a shift in how households manage day-to-day spending – notably in the continued decline of debit activity since its peak in January,” Stevens said.
Since it’s rare for the upper 5% to be using credit unions, this might be a very notable data point.
II. BEA Personal Income and Outlays Data
To add some indirect confirmation to the report above, the Bureau of Economic Analysis Personal Income and Outlays, May 2025 issued on June 27th had some interesting tidbits that were not discussed in the pump and dump media which seems to support the information in the Credit Union Times story above.
If one pays attention to housing and utilities, that is all inflation which bites in the discretionary and in the case of lower income citizens, non-discretionary spending ability for those households.
The other tables were more indicative of how severe this downturn in spending due to inflation and the tariffs is becoming.
Table 2 really should have grabbed the attention of the administration as to the potential indication of economic deterioration:
This is not taxes being paid limiting spending, a pandemic problem, or any other excuse ever promoted by the permabulls. This is a solid indicator, albeit before revisions, of personal income dropping substantially in addition to an apparent sticker shock from the idea of people fearing losing their jobs due to the trade war and ceasing spending in goods per the first table above.
The last three lines of Table 2 from the report above really tell the tale of the tape:
III. The American consumer is on the mat. Are they down for the count?
According to the financial and mainstream media, the answer is no.
Retail sales jumped more than expected last month
US Retail Sales Surge in Broad Advance, Topping Estimates
Retail sales snap back after trade wars die down. Shoppers keep the economy growing.
If one is to believe the Census Bureau reports on Retail Sales, then one would say yes. However the report that receives all the media attention is the seasonally adjusted portion of the release and does not focus on the main, key metric:
Keep in mind the June data is a raw number, the May number has had only minor revisions downward, and the April report further downward revisions. Odds are the June number will drop significantly by the second revision in September but by then who will care? The headlines were and are all that matters so the algorithmic trading programs can press prices higher and reality can be sorted out later.
IV. Desperate for Credit to Survive
As Americans exhaust credit lines, it does appear that they will apply for anything and everything to pay their bills off, even as reports like this below from Forbes on July 13th indicates the stress levels hitting the middle and lower class:
Mortgage Delinquencies Are Exploding: What Smart Investors See Coming
This excerpt below from this story should slap those in denial about what is happening to the bottom part of the ‘K’ economy.
The national delinquency rate is only 3.2% on paper. But things are different behind the scenes. VantageScore and Investopedia both say that what lenders are currently witnessing is true: early delinquencies are rising faster than any other type of consumer credit. The stress is real, it’s coming on early, and it’s going faster than most investors think.
This reality reframes the macro picture. It confirmed what many investors have felt beneath the surface: this isn’t just about high interest rates or inflation fatigue; it’s about behavioral collapse. The U.S. consumer is no longer just stretched. They’re snapping.
For all the talk about a “soft landing,” this is a hard truth. We’re witnessing the early stages of a credit deterioration cycle that markets are failing to price in. It’s showing up first in subprime auto, now in mortgages, and next it may bleed into broader consumer credit and regional banks.
I’ve added the extra emphasis to make a point that this is not “like” 2007, but it is a similar tune and refrain.
Meanwhile, automobile payment delinquencies continue to rise:
As the Federal Reserve data updates each quarter, it only looks worse, and worse, and worse, much like the pre-GFC era, now with auto delinquencies passing pre-pandemic levels per the report from the first quarter of this year via the Federal Reserve Bank of NY:
This means that consumers with access and the ability to obtain new lines of credit are doing what to survive and service their debts?
Borrowing more money.
From a Lending Tree report from June 23, 2025:
To even think this is a good thing that delinquencies took a pause in Q1 is not so great when you zoom out to the bigger picture. This trend of using personal loans for debt consolidation is one thing, but to pay everyday bills, is a nightmare. The shear volume in dollars of personal loan debt is on an unsustainable trajectory as this chart from the same article indicates.
To make matters worse, if one looks at the interest rates on these loans for the majority of users, it becomes obvious that defaults will accelerate with declining economic activity and the threat of increasing unemployment and/or income levels deteriorating.
On the good news side of things, this from the report might offer some hope, but there is a huge “but” I’ll add after the money quote and the chart.
An estimated 3.49% of personal loan accounts are 60 days or more past due as of Q1 2025 — a 6.9% decrease from 3.75% in Q1 2024 and a 10.7% decrease from Q1 2023.
The graph appears to reflect some massive improvement since the inflationary spike of 2022:
The bad part is this data is before the BNPL (Buy Now Pay Later) and student loan delinquencies impact the debts of the middle and lower class.
Unless the economy turns around, and quickly, this data shall only continue to deteriorate as Americans attempt to make at least a minimum payment on their accounts.
V. Consumers are Getting Desperate for Cash to Service Their Debt
The final data point which appears to validate the theory that the consumer is being beaten down and my indeed tap out soon is their ability to service the debt load that they have undertaken.
For example, look at just how few Americans can cover an emergency expense of $2000 or more per the latest Federal Reserve survey:
According to the survey of Household Economics and Decision-Making, only 48% said they would cover the expense with cash on hand. The rest would borrow, cut spending, or simply default.
Inflation tops the list of worries for the third straight year. 37% of respondents called rising prices their main financial challenge, up from 35% last year and four times the 2016 level. Separate Bankrate polling finds just 44% of households have enough savings to handle a $1,000 shock, a share that’s barely changed since 2022.
In other words, the savings boom generated by the easy money under all of the pandemic relief direct payments, student loan repayments suspension, and mortgage forbearance has or is in the process of coming to an end.
The degree of financial duress and/or potential financial illiteracy by the younger generations much younger than the baby boomers demonstrates they are in the worst of shape as the Bankrate.com Emergency Savings Report highlights in the following graphic:
To make matters worse, individuals and families are tapping their 401K’s to get any cash to service their debt as inflation has created more stress on family finances per the Vanguard “How America Saves” report on retirement accounts. This graph highlights the issue:
The money quote from the survey reported via 401KSpecialistMag.com was this sobering fact:
Despite raising their savings rates, participants slightly increased the amount of hardship withdrawals taken. In 2024, 4.8% of participants initiated a hardship withdrawal, even as 95% of participants reported not taking a withdrawal. Further, 13% of participants had a loan outstanding, and the average loan balance was about $10,700.
In summary, if the trade war continues unabated, which it appears that it will, the odds of a total collapse of the consumer will be realized in the data no later than September.
This was something that has happened in history before about 96 years ago but the equity bulls ignored the problem until it was too late.
Let us hope that America doesn’t shock the world again.