Hey friends - welcome back to your Friday morning. Soak up this last weekend of summer.

🌎 The Big Picture

I think I’ve been looking at things wrong.

Lower borrowing costs, strong spending, and record household wealth are giving families a bit more breathing room. But slower hiring, rising debt, student loan delays, and growing inequality mean that the “state of the economy” is very different depending on your income level.

The Federal Reserve decided to start lowering interest rates again this week. Lower borrowing costs and low-paying savings accounts typically stimulate the economy by encouraging more borrowing, spending, and investment. Over the past few years, the Fed has been ready to push the economy into recession in order to get inflation under control. But now, there’s a lot more pressure to switch from restrictive policy to stimulus mode. Part of that is because companies have stopped hiring, which is a core barometer of the health of the economy. Another part is intense political pressure to stimulate.

With all of Washington now in stimulation mode, a lot of people are pretty optimistic about the economy over the next two years. The stock market is defying normal levels of hype to break record after record.

I’ve been focused a lot on how financially strained most Americans and small businesses are, thinking that there’s going to be a breaking point at which the cost of living gets too high that people can no longer spend on stuff. When nearly 70% of the economy depends on consumers spending more and more each month, a healthy consumer is paramount. Eventually, the strain will be too much and the economy will crash.

However, I’m starting to question whether I’m missing the narrative here.

The question I have, and one you’ll likely hear a lot more discussion about in the coming years, based on where the economy is headed, is:

Will the US economy be able to support perpetual growth solely on the increasing wealth of the top 10-20% wealthiest individuals? Will there be consequences to the core barometers policymakers watch (GDP, corporate earnings, aggregate wealth) of a widening income inequality and the elimination of the middle class?

People (really Wall Street, Washington, & The Media they own) seem to be a lot less worried about the potential “transitory” inflation from tariffs than they were about the potential “transitory” inflation of the pandemic. It’s far from a clean comparison, but I say that to point out the strange indifference to the risks of raising the prices of everything we import by 10-50%, the costs of onshoring manufacturing, disrupting trade relationships, and shrinking the labor force at a time when inflation is already much higher than normal and most Americans’ budgets are extremely strained. Credit card, auto loan, and student loan delinquencies are climbing rapidly, near past recession rates, and people are able to save half of what they were pre-pandemic.

One data point might explain the expectation I’m missing:

The top 10% of earners now account for half of all spending in America, up from a third in the 90s.

Since the health of our economy is measured in growth, here’s an even more important one:

The top 20% of earners have grown their spending by 50% since the pandemic, but spending from the bottom 80% has barely kept up with inflation.

So, nearly all of our economic growth of the past five years has been driven by the increased spending of the top 20%.

Reality check: the top 20% means over $175,000 annual pre-tax combined household income. If you think two adults each earning $90k isn’t much, welcome to the affluent market.

We’re already seeing companies shift their models away from budget shoppers. Airlines mention the shift to premium fliers on every earnings call. Even Spirit Airlines is giving up on budget flyers. Dollar General and McDonald’s have talked about how their customer base is shifting to higher income. Disney has abandoned the middle class.

So, the question I’m asking now is:

Does it matter how much the bottom 80% struggles? Is there a breaking point, or can most Americans’ lives just keep getting a little bit harder each year, affording less and less non-essential spending, as businesses shift their focus to serving the growing wealth of the affluent market and the stock market keeps rising?

We know the stock market is not the economy. The market you hear about references the 500 biggest companies in the country. Small businesses employ almost half the workforce.

But now, the question is really, what is the US economy? And how do we measure success? If we’re not headed for a recession, the next few years could be very successful for the US economy, but it won’t be an equal distribution to every individual, worker, company, or industry.

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