The resilient American consumer has consistently defied economic pessimists in recent times. Real personal consumption expenditure has remained robust and stable through much of the post-pandemic expansion phase. Initially, consumption was supported by surplus savings due to significant fiscal transfers and by strong wage growth resulting from a tight labor market.

In more recent times, however, low- and middle-income families have faced challenges due to persistent inflation and high borrowing expenses. They have used up their excess savings, and diminishing wage growth is starting to impact them. Delinquency rates, particularly for credit card and auto loans among subprime borrowers, are on the rise.

As a result, personal consumption expenditure, a significant part of GDP, is increasingly influenced by the spending habits of high-income households. Those earning over $250,000 annually (the top 10% of earners) now contribute nearly half (as opposed to one-third in the 1990s) of all U.S. consumer spending. This raises questions about the growing dependence on affluent spending and its implications for the American economy.

In the field of economics, income and wealth are interconnected but distinct concepts. Income, which represents earnings over a period, is a flow variable. Wealth, which refers to net worth at a specific time, is a stock variable. Wealthier households typically have a lower tendency to consume marginal income compared to lower-income counterparts. Low-income families often spend more of any additional income they receive, while the affluent usually save a larger portion.

Furthermore, wealthy households invest their excess savings smartly in financial markets to increase their wealth. Wealth distribution in the U.S. continues to be highly skewed, with the wealthiest half holding 97.5% of national wealth, leaving the bottom half with only 2.5% by the end of 2024. Alarmingly, the top 0.1% controlled 13.8% of national wealth.

For low- and middle-income households, their wealth is often tied to real estate holdings, primarily their homes. Recent developments, such as Exchange-traded funds’ emergence and zero-commission trading platforms, have fueled retail investing and increased Americans’ exposure to the stock market through popular apps like Robinhood and social media groups.

However, financial assets are concentrated among a few and contribute significantly to the wealth disparity. Data shows that the top 10% owned about 87% of corporate equities and mutual fund shares by the end of 2024.

With rising price levels and sustained high-interest rates hindering lower-income spending, the economy is increasingly relying on wealthy households who have benefitted from a soaring stock market and high money market rates. This dependency amplifies the downside risks to the American economy from potential market corrections. A negative wealth effect from a decline in U.S. equity values could be more impactful than in previous economic cycles.

Recent analyses suggest that wealth effects may have greater macroeconomic significance in the post-pandemic era. An increased dependence on rich households for aggregate consumption further heightens the economy’s risk in the event of a stock market downturn. Local economies reliant on affluent spenders could be especially vulnerable.

The stock market may not only predict but possibly instigate business-cycle shifts today, unlike before. The market has historically relied on the ‘Fed Put,’ counting on the Federal Reserve to intervene with monetary support during market downturns. However, persistent inflation may challenge the Fed’s ability to cushion the blow this time around.

During his first term, President Trump closely monitored stock market performance. Interestingly, early signs of Trump’s second term suggest he may tolerate market corrections, implying a potential end to the ‘Trump Put’ era.

If Trump pursues his tariff-driven agenda, disregarding recent market volatility, an equity bear market could be inevitable. Wall Street’s optimistic forecasts earlier in the year would need a significant reassessment.

Elevated policy ambiguity, a dwindling consumer sentiment, and the fading “U.S. exceptionalism” trend could set off a detrimental cycle. Market turbulence reduces consumer confidence and yields negative wealth effects, cooling the economy, which then leads to declining corporate profits, perpetuating further stock market losses. If affluent households cut back on spending in response, a recession may ensue.

Dr. Vivekanand Jayakumar, an economics associate professor at the University of Tampa, penned this article.