US May Be Resting on a Risky Wealth-Effect Foundation
American consumer spending continued to be resilient in the face of President Donald Trump’s steep tariff increases.
That this would have been the case in late summer 2025 was unexpected by many at the start of the year.
The S&P 500 Index has handed investors a 15%-plus total return so far this year, bonds are up and home values are higher compared with 2024.
All in, Goldman Sachs economist Manuel Abecasis tallies that household net worth has increased to more than 800% of disposable (i.e. after-tax) income, near a record high.
As wealth has gone up, Americans’ savings rates have come down. In August, it was 4.6%
“This suggests that wealth effects are driving spending,” Douglas Holtz-Eakin, president of the American Action Forum, an economic policy research group, wrote in a note last week.
The flip side of that, Holtz-Eakin cautions: “One of the real risks to the outlook is the pricing in equity markets.”
Anatole Kaletsky, chief economist and co-founder of Gavekal, goes further.
If an economic downturn is avoided, this will “further entrench inflation,” making it more difficult for the Fed to lower rates — in turn putting pressure on the bond market.
“The period of greatest danger for US financial markets lies ahead,” he wrote in a note last week.
Chris Anstey Bloomberg October 6, 2025
The belief that politicians couldn’t withstand a major bear market has driven hopes for a Fed pivot that in turn inspired a series of rallies for the stock market.
https://englundmacro.blogspot.com/2022/10/the-feds-hope-lies-in-behavioral.html
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