A leading voice on policy and legislation, Donald Gainsborough is at the helm of Government Curated, where he deciphers the complex interplay between Washington and Wall Street. We sat down with him to discuss the conflicting signals in the U.S. economy, from the booming luxury market to the emerging signs of stress among subprime borrowers, and what it all means for American households.
We’re seeing strong demand for luxury goods, yet a Goldman Sachs partner recently stated the ‘K-shaped economy’ narrative isn’t backed by data. Could you unpack this discrepancy for us? Please share some key metrics you use to gauge the financial health of different income brackets.
It’s a fascinating contradiction, isn’t it? On one hand, you see the demand for Swiss watches and premium credit cards soaring, which paints a picture of a “Golden Age” for the top 10 percent. But then you hear from people like Richard Ramsden at Goldman Sachs, who are looking at broad, aggregate data and saying the narrative of the poor sinking while the rich swim isn’t quite holding up. The key is to look at the data sources. While we see luxury spending, we also look at Bank of America’s data, which shows that spending growth among lower-income households has remained positive. This tells us they aren’t collapsing. Another crucial metric comes from analysts at S&P Global, who note that U.S. households, on the whole, are sitting on balance sheets that are strong by multi-decade standards. So, while the top is certainly flourishing, the data suggests the bottom isn’t falling out—at least not yet.
Bank of America’s data shows positive spending for lower-income households, yet the JPMorganChase Institute reports weak income growth. How can both be true? Could you illustrate with an anecdote or example of how a household might manage its finances in such a scenario?
That’s the core tension right now, and it shows that a family’s balance sheet is more than just their weekly paycheck. It’s entirely possible for spending to remain positive while income stagnates. Imagine a working-class family where wage growth has been weak this year, as the JPMorganChase Institute found. They still have bills to pay and kids to feed, so they keep spending. They might be putting more on a credit card, drawing down savings they built up, or perhaps they’re simply forgoing saving altogether for a few months. Their account balances might remain flat, which the data confirms, but their outflow—their spending—is still holding up. This is a fragile state, however. It’s not sustainable in the long run without a corresponding rise in income.
Steve Bannon advocates for supply-side tax cuts to boost wages. How exactly would these cuts translate into higher take-home pay for hourly workers? Please walk us through the step-by-step economic chain of events that would need to occur for this policy to succeed.
The playbook is a classic supply-side argument, and the administration is banking on it to improve the public mood. The process starts with a large legislative package, like the “One Big Beautiful Bill” Bannon mentioned, which would enact new deductions for businesses. In theory, this lowers a company’s tax burden, freeing up capital. The second step is that businesses reinvest this capital into expansion—new equipment, new locations, and most importantly, new employees. As more companies start hiring, the labor market tightens. This increased competition for workers, in theory, forces businesses to offer higher wages to attract and retain talent. For hourly workers, this could be coupled with direct deductions in the tax code, increasing their immediate take-home pay. That’s the chain of events Bannon believes the MAGA base voted for and expects to see.
With unemployment ticking up to 4.6% and lenders bracing for deteriorating loan performance, what are the immediate risks for consumer credit? Please describe the top three warning signs you look for in subprime borrower data that could signal a wider economic downturn.
The immediate risk is a contagion effect that starts at the most vulnerable edge of the economy. When unemployment ticks up to 4.6%, it’s the subprime borrowers who are often the first to feel the pain, and that’s precisely what the American Financial Services Association is warning about. The first warning sign I look for is a rise in early-stage delinquencies. When you see a steady increase in subprime auto or personal loans that are 30 or 60 days past due, it’s the canary in the coal mine. Second, I watch for an increase in loan stacking, where a single borrower takes on multiple new loans in a short period. This is often a sign of desperation, using new debt to service old debt. Finally, I monitor the lenders themselves. When they start to publicly brace for deteriorating performance and tighten their lending standards, it chokes off credit for the very people who need it most, which can accelerate an economic slowdown.
What is your forecast for the U.S. consumer economy over the next 12 to 18 months?
My forecast is for a period of significant moderation and growing divergence. We can’t ignore the fact that household balance sheets are, as S&P Global noted, historically strong. That provides a substantial cushion against a full-blown collapse in spending. However, the headwinds are undeniable. With unemployment rising and the JPMorganChase Institute reporting weak income growth, the momentum is clearly slowing. I expect we’ll see consumer spending soften, as many analysts predict, but the experience will be vastly different depending on your income bracket. The top end will likely continue to spend on luxuries, while lower-income households, particularly the subprime borrowers showing stress, will face a serious squeeze. The key variable will be the labor market; if unemployment continues to climb beyond 4.6%, the stress we’re seeing in loan performance could easily spread and lead to a much more challenging economic environment.
