Our spending is what powers the economy. Literally. Over in the US consumer spending makes up around 70% of GDP so the more we spend the better our economy will be and the less we spend the more we hurt our economy. Soz. So all in all, us consumers can be pretty powerful when we want to be! Spending – and especially on large-ticket items (you know, like a cool $3,500 Apple Vision Pro) don’t happen in a bubble. 

We spend more when we feel like we have faith in our future. That things are looking up. When assets prices go up like house prices (which went through the roof since covid) we feel richer! Or when you suddenly log onto to your Coinbase account to find that your bitcoin has doubled. Which happened over the past 6 months lol.

You feel great about it! Duh. You’re making $$$. So the positive wealth effect kicks in. We feel empowered to open our wallets and splash the cash since we know we’ve made already made a killing (aka anyone who owned Nvidia shares pre-AI mania). And this is good for the economy. More spending = more growth. 

Why the “lipstick effect” is colouring our economy

The “lipstick effect” is all about spending on little luxuries – like lipsticks! – and cutting on other bigger purchases. We want to feel good about ourselves (it’s not called retail therapy for nothing!) we just don’t want to risk breaking the bank for it.

So you’d think the lipstick effect would’ve kicked in already thanks to high inflation + high rates but until recently, it was nowhere to be seen.

Inflation has largely fallen from its double-digit highs of 2022 if you can remember what that was like! You’d think the stratospheric rise in interest rates would put a dent in our pockets. What with mortgage rates rising along with our credit card bills going up (only for latecomers!). In fact, we’ve seen the total opposite! We’ve had this epic rise of YOLO spending – why we just can’t help ourselves despite our shrinking savings.

But you have to remember that interest rates move through the economy slower than you think. They can take anywhere from 6 to 18 months. It’s kinda like a teen weaving their way through a crowded frat party. Hard to get out the room without bumping into a few heads! 

What does a higher rate world actually mean?

And now we’re slowly starting to see the effects of a higher-rate world. One that, until 2yrs ago we didn’t really recognise. Unemployment (still incredibly low by historical standards) is ticking up. From Citi to Amazon to UPS to Google, they’re all firing workers. Some more than others. But it is happening.

Sure, some firms totally over-hired in 2021. They thought sky-high profits would go forever. So they ended up with a bloated workforce and now, to their dismay – they’re finding themselves on a diet.

I work for a bank who posted their largest-ever profit since ‘07 and guess what? They still laid off some 500 workers. So even companies that are doing well are realising they need to cut costs. Trim the fat where they can. Perhaps they’re preparing for what’s to come. That wouldn’t be a bad thing. (Psst: here’s how embracing the barbell strategy will give you the best shot at wealth + freedom).

So things are not fine. And when you look at the housing market which for most people is their #1 asset and so the largest source of wealth for most people it helps to explain some of our spending patterns.

The housing market activity, at least here in London and the UK more broadly, is slowing down. The market is taking a breather and it’s getting harder to shift properties. But trouble = opportunities! 2024 could help you negotiate a bargain as the housing market loses steam after 10+yrs of growth.

My family friend has a 2-bed for sale, with a listing price of £600k. They’ve dropped the price from £650k and my guess is they might have to drop it further. With mortgages at 5%+ prices have gotta come down. A slower property market is bad news for everyone. Here’s how soaring mortgage costs hit the rich and its effect on us all.

From sellers to retailers to estate agent. Smaller sale prices = smaller commission and the less people move home, the less $$$ will be spent on renovations. This is not good for anyone. Especially banks who rely on lending (and at high rates!).

We’ve been YOLO’ing for too long

Things have just felt so bad from sticky inflation to worsening jobs prospects (though if you fancy being an AI officer it’s a hot job that pays over $1m) that we want to experience things here and now.

We don’t want to squirrel away our money for a retirement we probably can’t afford anyway. It’s a never-ending loop of doom and gloom. But eventually, the money sorta runs out. We’ve gobbled up all our pandemic savings and are turning to credit cards. 

But once job losses start sweeping through the economy and house prices come down meaningfully, we’re all gonna slow down on our spending. Even more. Here in the UK, we’ve already done that.

So much so that we’ve pushed our economy into a recession. Aka we have had 6 months of our economy shrinking by 0.3% to be exact. In previous (worse) recessions this figure was around 1%. So it’s not terrible. Not good either! 

The lipstick effect is painting the real economy a deep shade of uncertainty  

The more uncertain we feel about our prospects the less we wanna be spending. And job prospects (or lack of!) plays a huge role. Without a steady paycheck you can kiss goodbye to all those little luxuries.

My friend got laid off 8 months ago and she said her severance package is running out. Meanwhile other friends who have since left uni are struggling to land their first gig. So spending on extras is not front of mind. In fact it’s the last thing they wanna be doing. And these 3 curious trends have emerged from recession fears and what it means for our work-life setup.

When you’re income is nil (or uncertain) you have to conserve what you have and be extra-careful on every single purchase. And this is what I’m seeing. People I talk to from my Gen Z pals to Gen X and older gens tell me they’re cutting back on the bigger stuff. 

They aren’t planning as many lavish getaways as they once did. They’re dining out less and they’re saving money where they can. But they’re topping up on the small lipstick treats to give them a pick-me-up.

A lot of people are worried the worst is yet to come and as the economy loses steam, the housing market will follow. After all, a strong jobs market is key to housing market growth. But landlords who are already facing steep increases in their mortgage bills may very well get hit with the double whammy of falling house prices. Though this is good new for Gen Z!

And while we’re getting our heads around all this, we’re not throwing out the need to treat ourselves. So we’re turning to the smaller stuff. Like a good old lipstick. Or some choc. Or both!

Someone I know owns a tea shop in central London. It’s a gorgeous little place that takes you into a bubble of its own. And with small businesses being hit from all sides (from more expensive loans to higher wages) his tea biz of booming. His customers tell him it provides them with a chance to take a breather.

To splurge a couple of pounds for a fragrant drink and make a day out of it. Consumers can’t spend hundreds of pounds shopping at designer stores or indulging in expensive restaurants so we turn to cheaper things, but no-less-enjoyable. 

Whatever lies ahead, set aside some cash for rainy days (ideally for 365 rainy days!) and never feel guilty about those small indulgences. You need them. And 100% deserve them. What’s life without an overpriced beverage?

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.