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- People are spending almost every dollar they have to keep up with rising prices and interest costs.
- They're cutting back wherever they can, paving the way for an economic slump, Stephanie Pomboy said.
- She warned of dire implications for pension funds, banks, real estate groups, and other businesses.
Steep rises in prices and monthly interest payments have left people on the brink of financial disaster, setting the stage for the economy to crater, says Stephanie Pomboy.
"The consumer is spent up and lent up," the Macro Mavens founder said on the latest episode of the "Thoughtful Money" podcast.
"They're spending every dollar they have, and then some, just to keep up with the basic necessities."
Pomboy noted that first-quarter economic growth was fueled by spending on housing, healthcare, and insurance.
"This is not consumers running out and taking vacations and buying second homes and a new car or anything like that, quite the contrary," she said.
The economist underscored that households are drawing down their savings and running up their credit cards just to cover everyday expenses, and cutting back on non-essential purchases.
Inflation spiked to a 40-year high of more than 9% in 2022, and has been tracking close to 4% in recent months — well above the Federal Reserve's 2% target.
The US central bank has responded by hiking interest rates from nearly zero to north of 5%, which has raised the monthly amount that people owe on their mortgages, credit cards, car loans, and other debts.
The one-two punch of surging prices and soaring borrowing costs has put the squeeze on households, forcing them to raid their piggy banks, rack up additional debt, save less each month, and slash their outgoings.
Pomboy pointed to the National Restaurant Association's monthly performance index, which had a "shockingly weak" reading in January as consumers dined out less, and remained depressed in March.
She also emphasized that retail sales have barely budged in two years once adjusted for inflation. Moreover, she highlighted recent cautions from Starbucks and McDonald's about waning consumer demand.
Pomboy worked for more than a decade at ISI — a trading group acquired by Evercore in 2014 — before launching her own investment-research firm in 2002.
She underscored that consumer spending is the engine of the economy, and company profits tend to suffer when it falters.
As a result, Pomboy predicted a "real slowdown in economic activity" with "problems around servicing debt among consumers and corporations."
She flagged disappointing data for consumer confidence, wage growth, and employment gains in recent months as warning signs.
Pomboy also underlined the risks to underfunded pensions of a broader downturn, and mounting pressure on banks as deposits are yanked and loan delinquencies rise among consumers and commercial real estate businesses.
"We've got a lot of painful time ahead of us," she said. "God forbid there's a reversion to the mean in the stock market or credit — that's gonna be ugly."
Pomboy is personally betting on hard assets with gold as her biggest holding, followed by real estate and some cash. She "wouldn't touch corporate credit with a 10-foot pole," and advised being "very defensive" on stocks as higher interest rates and cooling economic growth threaten to weigh on them.
The expert researcher has been sounding the alarm on consumers running out of cash for over a year, echoing other gurus including Michael Burry of "The Big Short" fame.
Yet the economy has skirted recession, the stock market has surged to record highs instead of crashing, unemployment remains historically low, and corporate profits have mostly held up, meaning Pomboy's warnings have been off the mark so far.