The Consumer's Squeeze, How Americans Are Feeling The Financial Pain

Daily new financial reports come across my desk – each one a specific measure of financial viability. Often these events are headline news, like the announcement last week by the Federal Reserve Chairman of its latest decision on interest rates, more of that in a moment. But first, we'd like to talk about two other reports, both somewhat obscure, but devastating in their effect on the American pocketbook.

So, let's take a look at last week's data. The Bureau of Economic Analysis, perhaps the most authoritative government agency, announced that Personal Income rose 0.6% in March. That's a very positive result and indicates that the labor economy is humming along nicely, thank you – companies are still providing raises, and employment is trending positive.

It's on the consumption side that we saw the real issue. I've provided a chart of the percentage change in income and expenditures for consumers, and it shows a dramatic increase in spending, the kind of day-to-day spending that everyday Americans need to maintain their living expenses. It's something we haven't seen in a while, and, broken down, it shows that ordinary citizens are barely treading water.

We all know why this is happening: the price of gasoline is spiking because of the Conflict with Iran. Since the Strait of Hormuz is blockaded, US gasoline prices have spiked. It ought to show the fallacy of those, including the President, who predicted that this country, because we're net exporters of gas, would not feel the pinch. The price at which international gasoline trades is a very complex equation. But for now, let's point out that Americans are paying 47% more at the gas pump than they were at the beginning of this year ($4.12 vs. $2.80 per gallon). And that this hike in gas prices is having a devastating effect on consumers' wallets.

It has had the predictable effect on spending; in the same BEA Report, they indicate that people have begun to curb their driving, with gasoline spending down 1.4% in March. This reduction in driving will have a downstream effect if people stop going to the Mall, the restaurant, or just for entertainment—something we need to watch.

Finally, one last note: all this comes with a strong labor economy; wages and salaries rose in March. Should income decline, as in a recession, this rise in gasoline costs would be punishing.

Interest Rates

In what had to be one of the most theatrical Federal Reserve Meetings of all time, Chairman Jerome Powell announced "no change," rates will stay steady at 3.75%. All this came after President Trump cajoled Powell into lowering interest rates. When the Chairman held to his guns, Trump decided that he was spending too much on refurbishing the Eccles Building, the Fed's headquarters. An especially delicious accusation when one considers the projected, and steadily rising costs for the President's "Ballroom."

Less than a week before the Fed's meeting, Judge Jeanine Pirro closed the probe of Powell, enabling the Fed to proceed with its interest rate decision unfettered. It's been quite a show, with the President seeking to relax interest rates, thereby hoping to boost the economy.

It's easy to assume that the President and the Fed Chairman are simply on opposite sides of this equation: the President wants a more relaxed financial policy, the Fed Chairman wants to hold the line. However, there is something we need to watch carefully, because it may indicate that things aren't quite as black-and-white as they seem.

Let me take you back to the Great Financial Crisis of 2008. Wall Street had its back to the wall. If nothing were done to bring us out of the monetary abyss, we might suffer a real calamity, something that might resemble the historic crashes of the past. Fortunately, the Fed Chairman at the time was Ben Bernanke, a Princeton Professor who had spent his academic career studying the 1929 Stock Market Crash. Bernanke, along with other members of the Fed and Wall Street, decided to inject billions of dollars into the financial system to bring us out of the monetary tailspin. In a process they called Quantitative Easing, the Fed provided banks and brokers with the capital to mitigate major bank or institutional failure.

Again, during the COVID-19 Crisis beginning in 2020, the Fed injected massive amounts of liquidity into the nation's financial institutions through various programs and grants. Consider these as massive loans, by the Federal Reserve, to the country's entire financial structure. Now, as we all know, loans must eventually be paid off – and that's just what the Fed has done ever since. From a peak of roughly $9 trillion, the Fed has diligently paid down this loan (reduced its balance sheet) until this year. Beginning this year, the Fed has suddenly gone back into stimulus mode – adding to its balance sheet. In other words, the Fed is now injecting funds into the system as it did in those other two crises. Although the amount is relatively small ($168 billion) by Fed standards, it still raises a question. When an institution as hidebound as the Fed changes direction, it's worth noting. Let's keep an eye on this, too.

Misc

Finally, in another one of those two-part reports, we led with the good news that housing starts rocketed ahead by over 10%. Good news indeed. However, this is just the sort of behavior we saw during high-inflation periods: builders are anxious to purchase goods and materials before prices go higher.

What's more, the following report, Building Permits, fell to levels not seen since August of last year. Building Permits, after all, are the first step in the home construction process. This drop in permits should give us a pause.

Finally, I note that the final revision for Q1 2026 GDP rose by 2%. It was due, in large measure, to the Federal Government returning to work after its lengthy shutdown.

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