Income Growth Outpaces Goods Spending Amid Ballooning Debt and Uncertainty

The gap between rising incomes and spending patterns is widening, creating underlying economic tension. Recent data shows U.S. real disposable income climbing 0.4% in December alone. Yet, this income growth isn't translating evenly across consumption categories, revealing a significant imbalance.

Households are clearly favoring services over goods. December's spending surge was driven by $78.2 billion in services, far outpacing goods spending at $55.4 billion. This strong services demand contrasts sharply with the inherent volatility often seen in goods purchases, which can fluctuate more sharply with economic sentiment and pricing.

However, the most concerning signal lies in the saving rate. Despite the income gain, the absolute savings figure stood at $843.2 billion, representing a paltry 3.8% of income. This historically low buffer means households have minimal financial cushion to absorb unexpected shocks like job loss or inflation spikes. While services spending remains resilient, the combination of goods volatility and eroding savings creates vulnerability, particularly if income growth stalls or costs rise further. The divergence highlights potential fragility beneath the surface spending strength.

Balance Sheet Vulnerabilities: Debt and Margin Erosion

Household leverage remains a key vulnerability, with total debt hitting $18.59 trillion. This includes credit cards and student loans showing particular weakness, with delinquency rates climbing to 9.4% for student loans. That pressure is amplified by a historically low 3.8% personal saving rate according to the latest data, leaving households with minimal buffers against income shocks.

Compensation growth is partially offsetting these pressures by fueling income gains, but this creates a trade-off. Higher wages increasingly go to cover debt servicing costs rather than discretionary spending, compressing household margins. The low saving rate means households have little flexibility to absorb further payment shocks, especially as delinquency risks remain elevated.

This combination-high debt levels, weak credit quality in key segments, and minimal savings-creates fragile household balance sheets. Even modest income stagnation could trigger broader spending contractions, as consumers lack both the savings cushion and discretionary income to maintain current consumption patterns.

Supply Chain Stress, Confidence Erosion, and Tariff Overhang

Consumer confidence is crumbling, signaling deeper trouble ahead for durable goods. The Conference Board's November 2025 US Consumer Confidence Index sank to 88.7, below the recessionary threshold of 100, with expectations stubbornly stuck under 80 for ten straight months. This pervasive pessimism translates into action: consumers are actively trimming plans for big-ticket items like cars and appliances. With inflation expectations ticking up to 4.8% and worries about jobs, incomes, and trade wars dominating concerns, this retreat from discretionary spending poses a tangible threat to companies reliant on steady demand for physical goods.

Compounding this demand-side weakness, supply chains are becoming a major source of friction and cost inflation. Geopolitical tensions, labor disruptions, and climate events are fracturing global logistics networks. The KPMG 2024 supply chain report flags this fragility as a key driver of persistent goods inflation. Rising shipping costs exemplify the strain: Red Sea disruptions alone caused spot freight rates to surge 50%, pushing import prices higher across sectors. This volatility makes planning difficult and erodes profit margins for manufacturers and retailers, especially when demand softens.

Tariff policy adds another layer of uncertainty and cost pressure. The U.S. effective tariff rate has climbed to 15.8% by August 2024, heavily influenced by tariffs on Canada (35%) and China. While a temporary truce later reduced China tariffs to 32%, the elevated baseline remains. These import duties directly inflate the cost of many durable goods, squeezing consumer budgets and business operating expenses. J.P. Morgan warns that further trade escalations, such as potential 100% tariffs on Chinese rare earths, could create short-term volatility and push prices even higher, likely dampening demand further. For businesses operating with thin margins, this triple whammy of weaker consumer confidence, tighter supply chains, and higher tariffs creates a precarious environment where even a 1% decline in durable goods spending could significantly impact cash flows and profitability. The lingering uncertainty around trade policy renewals, like the USMCA in 2026, further discourages investment and cross-border activity.

Monitoring Framework: Thresholds and Catalysts

Building on our analysis of household financial health, let's define specific triggers that could force a portfolio rebalance.

Household Vulnerability. U.S. household debt now stands at a staggering $18.59 trillion according to the latest research. While overall delinquency rates haven't spiked alarmingly, the 9.4% rate for student loans (90+ days past due) signals ongoing stress, particularly problematic given delayed payment reporting from 2024. This debt load severely strains the income-to-debt-service ratio, especially when combined with stagnant real disposable income growth.

Policy Pressures. The 15.8% effective U.S. tariff rate creates a direct cost burden on households. While a temporary China tariff reduction offered partial relief, persistent elevated rates on imports (like those on Canadian goods at 35%) inflate prices for everyday items. This policy uncertainty, alongside potential legal challenges to tariffs, could disrupt supply chains and further erode purchasing power. The Federal Reserve's terminal rate of 2.875% limits its ability to stimulate demand during these headwinds.

Spending Shifts & Triggers. The December 2024 spending split highlights reliance on services ($78.2B) over goods ($55.4B) according to the latest data. A sustained decline in goods spending is the key early warning sign. We will monitor BEA data closely: a 1% quarterly drop in real goods consumption triggers a position reduction, indicating consumers are tightening discretionary budgets according to the latest data. Concurrently, any surge in the 3.8% saving rate without corresponding income growth would signal defensive behavior, increasing recession risk.

Action Thresholds:
1. Reduce Position: Sustained >1% quarterly decline in real goods spending.
2. Wait and See: Significant escalation in tariff disputes or new regulatory shocks impacting consumer goods.
3. No Action: Student loan delinquencies rise moderately without broader spending contraction.

These triggers directly align with our risk-first stance, focusing on cash flow strain and regulatory friction before broader economic sentiment.