Consumer credit's next turn is already in the GDP data

Governments can flatter a GDP print. The federal shutdown suppressed fourth-quarter activity and the reopening pushed an estimated 70 basis points back into the first quarter, distortions that largely wash out to leave the U.S. economy's underlying six-month pace at 1.2% annualized real growth, not the 2.0% headline. That adjusted figure, from Insurance AUM Journal's midyear outlook, is the one a general-account allocator should be working from.

Michael Acton, head of research and strategy for North America at Insurance AUM Journal, frames the moment in a midyear note published this week as an energy shock arriving on top of a slowdown already in motion: a sharp rise in oil and gasoline prices tied to the Middle East conflict landed after last year's tariff and immigration disruptions had cooled growth, and the note reads the opening quarter accordingly, with preliminary first-quarter real GDP of 2.0% annualized coming in below expectations and improving only relative to a fourth quarter distorted lower by the shutdown. The mechanics are the classic ones — purchasing power compresses, headline inflation pops, confidence slips — and Acton's open question is whether the episode is temporary or persistent.

The hit to household budgets is direct: higher fuel and utility bills are consuming the fiscal tailwind from larger-than-normal tax refunds and new lower withholding rates, an effective oil tax that the research says has neutralized much of the temporary stimulus. The refund checks and the withholding cuts were the support that made the early part of the year feel manageable, and the oil shock, in the research's arithmetic, simply hands that support back at the pump, leaving households to spend materially more per month on energy than a year ago — a real headwind at an adjusted 1.2% growth pace.

For an insurance balance sheet, this hits directly. A general account runs long against liabilities and earns its keep on the spread between what the curve pays and what credit pays, much of which comes from household obligors — mortgages, auto paper, card receivables. A pension with decades of duration can outwait a growth scare, but an insurer's capital is priced against the liabilities it already wrote. A macro note that stops at confidence surveys would be an academic exercise; this one reaches through to the credit stack, where the growth read becomes an allocation input rather than a curiosity.

The part that should worry an allocator is the balance sheet underneath the consumer, where spending splits along income lines: upper-income households absorb higher fuel costs out of wealth buffers, while lower-income households, in Acton's telling, have largely exhausted pandemic-era excess savings, are leaning harder on revolving credit, and report a rising perceived risk of missed payments. Confidence, which had already fallen sharply over two years, took an additional leg down once the war began and now sits at the lowest reading since the University of Michigan survey started in the early 1950s.

The research pins the timing to the Federal Reserve Bank of Atlanta's GDPNow tracker, which eroded from an expected 3% before the start of the Iran War to under 2% in the days before the release. GDPNow is a nowcast rather than a forecast, but its slide in this episode traces the market's own repricing of the war's economic cost, and once the shutdown distortions are folded back in, the picture is an economy growing below trend, carried by a consumer running low on dry powder.

The allocation read is uncomfortable. In the credit sectors where stretched consumers sit — auto asset-backed securities, unsecured personal loans, the subordinate slices of card deals — the strain showing in the survey data is where downgrade cycles begin, and the outlook does not name sectors or tranches because it does not need to. Household stress was already mounting before the energy shock, and the shock has deepened it. An insurer still reaching for spread in that part of the stack is betting that a consumer at survey-record lows keeps servicing real, unsecured borrowing in real terms. That is a yield decision dressed up as a carry decision, and at a 1.2% adjusted pace it is the wrong trade.

The rate path collides with the same data. As this publication reported earlier this month, Warsh's hawkish June meeting left agency MBS carry thin — a 2-basis-point widening in option-adjusted spreads that told insurers the trade no longer paid, and that stance was set when the growth data still carried the 3% GDPNow gloss. If the adjusted numbers in this outlook are right, the policy conversation turns from holding to easing, and the duration extension that looked expensive in June starts to look cheap.

The note's title is 'The Search for Growth,' and for general accounts the search now runs through the consumer's income statement, with the monthly confidence readings and the GDPNow prints as the leading indicators. If confidence holds at survey-record lows into the autumn, the consumer credit cycle turns; the open question is which tranche gets marked first.