The U.S. economy is increasingly split into tiers, with much discussion at the macroeconomic level regarding the K-shaped (two-tier) or E-shaped (three-tier) divide. In either case, a small segment at the upper end of the wealth and earnings spectrum appears to be driving most spending and investment.
Evidence includes major airlines adding more first-class seating and strong demand for luxury goods and services. For many in the middle- and lower-income segments, however, inflation, job insecurity and simply making ends meet remain daily realities.
For those checking our country’s economic health, here’s what to watch this spring and summer:
Who’s landing jobs? Watch job numbers and unemployment closely — particularly which segments are losing jobs. Corporate “C-suite” directives to reduce the labor force through AI automation and robotics are real and accelerating. The emphasis on profits over people continues to drive earnings and stock values.
Employment numbers are typically lagging indicators of the economy, but they could become predictors of the depth and duration of the next downturn or recession. Pay particular attention to job availability for recent university graduates, beyond those entering the skilled trades.
Consumer sentiment: Record low. A key metric to watch is the Index of Consumer Sentiment, published monthly by the University of Michigan. Current readings are in the red-light range, meaning below 75. A record low of 47.6 was posted in April, which is a dangerous level for the general economy. This signals that a large share of the consuming public is under financial stress and pulling back. That is significant because consumers drive roughly 70% of the U.S. economy.
Sentiment is closely tied to stock market performance and housing values, a concept known as the wealth effect. Research suggests that for every $1 increase in stock equity, spending rises by about 5 cents. In housing, a $1 gain in value corresponds to roughly 7 cents in additional spending.
The reverse is also true. When asset values fall, spending tends to decline by roughly double the rate of the gain. Economists call this the negative wealth effect. The most vulnerable group is individuals over 60, whose wealth can be significantly impacted by corrections in stocks or housing. Spending declines of up to 20% are possible. As individuals age, the fear of outliving their savings intensifies, often leading to a “bunker mentality” around spending.
Investment lockup. The chaotic economic environment that is impacting consumer confidence has now moved to another level: investment. The housing market, which represents 1 in 7 jobs in America, is showing distress.
First, the rate of home sales in March was negative 3.6% year over year. Potential homebuyers canceled over 16% of purchase contracts in recent months as the result of economic uncertainty. In the farm and ranch sector, new machinery sales nationwide are dramatically softer. These elements must be closely monitored over the next few months.
The bottom line
The spring and summer seasons will serve as a real-world test of resilience for consumers, equity markets and housing markets alike. The data points above are worth reviewing regularly