The U.S. consumer sector has once again surprised the markets: in August, spending rose by 0.6%, beating analysts’ forecasts and underscoring the economy’s resilience as the third quarter progressed. At YourDailyAnalysis, we note that this growth is particularly striking given the ongoing slowdown in the labor market. The real driver has been high-income households, whose wealth is fueled by a strong stock market and elevated real estate prices.
According to official data, household spending – which accounts for more than two-thirds of total economic activity – climbed after a 0.5% gain in July. We believe the key factor here is the wealth effect: household assets surged to a record $176.3 trillion in the second quarter, giving upper-middle-class and wealthy Americans a sense of financial confidence. As our analysts at YourDailyAnalysis emphasize, such a concentration of demand in the hands of affluent households increases the economy’s dependence on equity markets and housing prices.
Behind the upbeat data, however, lies a troubling asymmetry. Lower-income households remain under strain from higher prices driven by tariffs and the looming cuts to the federal Supplemental Nutrition Assistance Program (food stamps). We highlight that this segment of the population is becoming increasingly vulnerable, potentially deepening both social and economic imbalances.
Despite this “two-speed” pattern of consumption, the short-term data show the U.S. economy still has momentum. “The wealth effect has become a powerful driver of spending – a positive when asset prices are rising, but a risk if and when they correct,” stress our experts at YourDailyAnalysis.
We are convinced that the coming months will serve as a test for the U.S. economy. If equity markets and housing prices hold their ground, consumer spending will likely continue to anchor growth even in the face of labor market weakness. But any deterioration in asset markets could quickly undermine the consumer sector. At YourDailyAnalysis, we recommend that investors and market watchers take this duality into account: today’s demand strength is impressive, but tomorrow it could turn into a vulnerability if the wealth effect stops working.
