Confronted by higher prices for gasoline and a range of other everyday products, US households are spending more in total, rather than cutting back on their purchases. This defies the many economic forecasters who expected that paying more for the basics would discourage consumers from spending money on less essential items, holding back expenditure and GDP growth overall.
Kevin Hassett, the director of the US National Economic Council, has hailed the rise in consumer spending – and the associated surge in borrowing – as signs of an economic boom. It seems hard to argue that people are better off if they are having to pay more for the same goods and services as before, and are taking on more short-term debt to fund the extra spending.
Hassett is statistically correct, however. If people pay more for everything, and the higher prices are not entirely matched by extra cost for producers, more value is being created in the economy and GDP will rise in real terms. To the extent that higher bills are affordable to consumers and generate more profit for producers, the cost of living crisis may actually be promoting GDP growth in the US.
This contradicts the conventional economic opinion that views inflation as harmful to economic growth. But growth can happen under these conditions when consumers cannot or will not switch away from goods or services whose price rises faster than average.
This effect has long been visible in performing arts and other creative industries. These industries depend on individuals who, even with technical help, are unable to keep producing more in a day without losing quality.
While audiences often complain about the ever-rising cost of tickets for live music or sport, these events still sell out. So long as audiences keep paying, the real output of these industries keeps growing, even if there is no increase in the number of matches or concerts played.
Uneven growth
There are other reasons why recent GDP growth has not made the average US household feel better off, or revived the fortunes of Trump and his governing Republican party. Polling by the Economist suggests that 58% of Americans currently disapprove of Trump. This makes him the most unpopular US president since 2009, when Barack Obama was grappling with intense public anxiety over the global financial crisis, despite the uptick in growth.
GDP is a measure of total economic output. It is calculated by adding up the sum of all final incomes earned within a country’s borders, including wages, profits and taxes on imports. The calculation does not account for how much – or how little – individuals receive.
Much of the recent gain in the US has flowed to people already high up the income and wealth scale, shifting the distribution of GDP from wages towards profits. Expectation of a continued profit boom is one reason stock markets have continued to rise despite Trump’s tariff regime and wars, as well as other global turbulence since 2021.
At present, US growth is fragile. This is because of its reliance on borrowed money to fuel consumer spending. Household debt in the US was already at levels that trouble some economists before the latest cost-of-living squeeze. Total US household debt is greater now than when it reached crisis proportions in 2008, tipping the US and the world into recession.
US company debt is also higher now than in 2020, when the COVID pandemic began, though it has been declining since 2021 as firms have used recent profits to pay it down. There are fears that companies’ debt-to-income ratio may be higher than officially measured, due to a recent sharp rise in private credit. This form of debt is not monitored or regulated as heavily as debt from traditional sources.
The situation for indebted households and firms will improve if interest rates fall, as Trump has demanded from his newly nominated Federal Reserve chair, Kevin Warsh. But financial markets are anticipating the opposite, as higher prices and government borrowing generate inflation that typically pushes interest rates up.
This leaves it doubtful that the bright start to US growth in 2026 can last through the rest of the year. Any rises in borrowing costs or a fall in stock markets would begin to squeeze consumer spending and business investment, even if the high oil prices have subsided by then.
Alan Shipman, Senior Lecturer in Economics, The Open University
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