Our kids were at camp last week so my wife and I took a last minute trip to Chicago.
We stayed at a nice hotel, walked around the city, did some shopping, ate some nice meals and consumed a few drinks. It was a nice time.
After dinner we took a stroll on the river walk.
It was a Tuesday night. All the bars and restaurants were full of people. They were eating, drinking, smiling and spending money on $19 cocktails.
I made a comment to my wife about how everyone says the economy stinks but their actions don’t back up those words. I think she rolled her eyes at me.
This is not just anecdotal. The data backs me up on this:
Inflation in the price of food and drink has been tough to stomach but people are spending through the sticker shock.
It seems like everywhere you look people are spending money these days.
People are spending on hotels too:
Late-July had the busiest day for commercial air traffic in history.
Last weekend saw the biggest box office haul ever at the movies.
So the bars and restaurants are full. People are still traveling and going to the movies.
People are also spending money on luxuries.
There was a story in The Wall Street Journal about how people are spending a fortune upgrading their engines for fishing boats:
Why are people adding multiple engines to their boats? To go faster, of course. And they are not shy about spending money to do so:
The biggest engines are often installed in pairs or quads, bestowing “Miami Vice”-style speed on large vessels packed with creature comforts.
“Everybody has big boat-itis, or they want to go faster and faster,” said Scout Boats founder Steve Potts.
High-horsepower outboards range from 200 hp to 600 hp, and cost anywhere from $20,000 to $70,000-plus per motor. They have helped the boating industry navigate the choppy economy better than others that make pricey discretionary goods, such as RVs.
Four engines on the high end would be worth more than we spent on my first house in 2007.
But I’m not here to judge. I bought a new boat this year for a bigger engine!
When I purchased our new pontoon, the guy at the boat dealership told me no one needs anything when it comes to a boat. It depends on what you want.
Lots of people can buy what they want because of a booming stock market:
Raymond James analyst Joe Altobello said marine companies are focusing on upscale buyers, whose soaring stock portfolios have given them the confidence to splurge.
Part of this comes down to rich people having a lot of money to spend because they own stocks and houses and businesses that have run up in value. But there have always been rich people with a high propensity to spend.
Government spending and big deficits have helped this decade too.
But it’s also the simple fact that people have jobs. People complain about high inflation but households have been willing to spend if they have a job. And the labor market remains strong even in the face of threats from AI.
The unemployment rate in America has now been below 5% for almost 5 years. But look what happens if we modify the unemployment rate chart to account for the Covid spike:
There was an additional 42 months of the unemployment rate below 5% heading into Covid. Put that together and now you’re looking at 8-9 years of an unemployment rate at sub-5%.
The 1990s were a massive boom time for the U.S. economy. Yet from 1990 through the spring of 1997, the unemployment rate never once dipped below 5%. It was never lower than 5% a single time in the entire decade of the 1980s.
I know some people think this is because the unemployment rate is masking a declining labor force participation rate but that’s simply not true. The prime age labor force participation rate is now much higher than it was at any point in the 2010s and near the all-time peak which came at the tail-end of the 1990s boom:
Will this last forever?
Of course not!
And when the unemployment rate does tick up for whatever reason and people start losing jobs in large number, I believe there will be a severe overreaction from many households.
Just think about how quickly sentiment turned sour once high inflation came back for the first time in 40+ years. No one was used to it anymore. Well we haven’t had a real recession in almost 20 years. We’re not used to seeing co-workers, peers, neighbors or family members lose jobs at a high clip.1
I know a lot of people hate the economy right now for very good reasons.
High inflation is no fun to deal with. It’s a terrible time to buy a house. Wealth inequality feels like it’s always getting worse.
But people still have jobs. Consumers are still spending lots of money. Household balance sheets are in good shape.
As long as the economy keeps growing and the unemployment rate remains relatively low, Americans will continue spending.
It’s what we do best.
Further Reading:
4 Big Questions About the Economy
1Yes the unemployment rate did spike during Covid but the government sent out so much money that most people were made whole and the labor market had a record recovery.
