🚨 US Stock Market Surge vs Consumer Spending Drop
Today Korean Economic News for Beginners | 2025.09.22
0️⃣ Mixed Economic Signals Confuse Investors
📌 Fed Rate Cuts Boost Stocks But Low-Income Consumer Spending Drops Fast, Real Economy Warning Lights Flash
💬 US stock markets are showing strength due to expectations of Federal Reserve interest rate cuts, but clear signs of consumer spending weakness are emerging in the real economy. Consumer spending is dropping sharply, especially among low-income groups, causing retail and restaurant companies to issue earnings warnings one after another. A combination of slowing wage growth, rising housing and utility costs, and higher living costs due to tariffs is rapidly weakening household purchasing power. Major retailers like Walmart and Target have expressed concerns, saying "consumers are cutting spending on everything except essentials," and with middle-class families also reducing spending, worries about economic slowdown are growing.
1️⃣ Easy to Understand
On the surface, the US economy looks good, but in reality, ordinary people's financial situations are getting harder. Stock markets are going up while the people who actually buy things are spending less - a strange situation is happening.
First, let's understand why stock markets are rising. When the US Federal Reserve (Fed) lowers interest rates, you don't earn much interest from keeping money in banks. So investors move their money to stock markets looking for higher returns. That's why stock prices go up.
But ordinary people's lives are getting harder. The biggest problem is that wages aren't rising much while living costs keep going up. Especially rent, electricity bills, and gas bills - the money you must pay - have increased a lot. For example, if someone earning $3,000 per month pays $1,500 for rent and utilities, they have $1,500 left for food, transportation, and medical costs. If rent goes up by $200, they only have $1,300 left for living expenses.
In this situation, people naturally cut spending on "non-essential" things like eating out, buying clothes, or traveling. Major stores like Walmart and Target are saying "customers only buy what they really need." Even fast-food places like McDonald's say "fewer customers are coming," which means people are really spending less money.
Trade tariffs making imported goods more expensive is also a problem. Tariffs are taxes on goods coming from other countries, and consumers end up paying this cost. When Chinese clothes or electronics become more expensive, people can buy fewer things with the same amount of money.
In the end, stock markets are rising because of wealthy investors, but ordinary consumers who actually drive the economy are closing their wallets. If this gap continues, companies' earnings will eventually get worse, and then stock markets will have to come down too.
2️⃣ Economic Terms
📕 Fed Rate Cuts
Fed rate cuts are when the US Federal Reserve lowers interest rates to boost the economy.
- When rates go down, borrowing becomes easier and investment and spending are expected to increase.
- But at the same time, money flows into risky assets like stocks, which can create bubbles.
- If the real economy doesn't support it, the gap between financial markets and the real economy can grow.
📕 Consumer Spending Drop
Consumer spending drop is when household purchasing power falls and overall consumer spending decreases.
- It happens when disposable income shrinks due to wage stagnation and rising living costs.
- Optional spending drops first, starting with non-essentials, then gradually spreads to all spending.
- When spending drops, company revenues decrease, which creates a vicious cycle of reduced employment and wages.
📕 Disposable Income
Disposable income is the money you can freely spend after taxes and essential expenses.
- It's what's left from your salary after taxes, rent, and utilities.
- When disposable income shrinks, optional spending like dining out, travel, and shopping drops first.
- Changes in disposable income are important indicators for predicting consumer spending trends in economic analysis.
📕 Tariff Effects
Tariff effects are how tariffs on imported goods impact final consumer prices.
- When the government puts tariffs on imports, importers add this cost to product prices.
- As a result, consumers pay higher prices and their purchasing power falls.
- Tariff increases on essential goods have a regressive effect, putting more burden on low-income groups.
3️⃣ Principles and Economic Outlook
✅ Growing Gap Between Financial Markets and Real Economy
Let's analyze the dual structure of financial market boom and real economy slowdown currently appearing in the US.
First, the Fed's monetary policy helps asset markets but has limited effects on real economy recovery. Lower interest rates are increasing money flowing into stock and bond markets, raising asset prices. Portfolio values for institutional investors and high-income groups have increased significantly. But this "wealth effect" isn't improving ordinary consumers' real purchasing power. Low-income and middle-class groups have low stock investment ratios, so they barely benefit from financial market gains.
Second, real income is decreasing due to slowing wage growth and rising living costs. According to US Labor Department statistics, average hourly wage growth slowed from 3.8% to 3.2% year-over-year, while housing costs rose 5.2% and energy bills rose 4.7%. Especially for the bottom 20% income group, over 40% of income goes to housing costs, so rent increases have a huge impact on household budgets. This is leading to sharp cuts in optional consumer spending.
Third, changes in consumer patterns are directly hurting company earnings. Looking at recent quarterly results from major retailers, essential goods (groceries, daily necessities) sales increased slightly, but durable goods like clothing, electronics, and furniture sales decreased significantly. McDonald's announced same-store sales dropped 1.5% year-over-year in Q3, and Starbucks said US store visitor numbers dropped 6%. If this consumer weakness continues, it will likely lead to worsening company profitability and job cuts.
The gap between financial market optimism and real economy difficulties is widening, deepening policy dilemmas.
✅ Widening Consumer Gap by Income Level and Economic Slowdown Risk
Let's examine different consumer patterns by income level and their impact on the overall economy.
First, sharp drops in low-income spending are hitting the overall consumer market hard. Consumer spending by the bottom 40% income group decreased 8.2% year-over-year. They mainly use large stores, fast-food restaurants, and discount stores, and these businesses are showing notable earnings deterioration. Walmart said "preference for low-priced products has become even stronger," and discount stores like Dollar Tree said "customers are buying smaller-sized products." This shows people are forced to reduce quantities to buy necessary items with the same budget.
Second, consumer weakness is spreading across the board as even middle-class families reduce spending. The middle 40% income group also cut non-essential spending by 4.5%. Dining out, travel, clothing, and electronics purchases decreased significantly. Apple Store sales dropping 3% year-over-year and Amazon Prime Day sales growth being half of previous years also reflect this trend. Middle-class spending cuts directly hurt premium brands and service industries, raising concerns about job losses.
Third, only high-income groups are maintaining consumption, breaking the overall economic balance. The top 20% income group increased spending by 2.3% as their assets grew from stock investment gains. But their consumption focuses mainly on luxury goods, premium services, and real estate, with limited overall job creation effects. Meanwhile, reduced consumption by most citizens affects wide-ranging industries, lowering overall economic vitality. If this imbalance continues, there's risk of not "K-shaped recovery" but "reverse K-shaped recession."
Widening consumption gaps between income levels are emerging as structural problems threatening economic growth sustainability.
✅ Policy Response Limitations and Future Outlook
Let's analyze the effectiveness and limitations of monetary and fiscal policy in the current US economic situation.
First, the Fed's interest rate policy alone can't solve the consumer weakness problem. Lowering rates further increases asset market bubble risks and concerns about inflation reigniting. Moreover, current consumer weakness is due to real income decreases and living cost burdens rather than interest rate levels, so monetary policy transmission isn't working properly. Even within the Fed, opinions are emerging that "rate cuts alone can't solve household purchasing power problems." Rather, additional rate cuts might cause dollar weakness and import inflation, further increasing living cost burdens.
Second, fiscal policy capacity is also limited with large political constraints. The Biden administration has already executed large-scale fiscal spending through the Inflation Reduction Act (IRA) and Infrastructure Investment Act, and federal debt ratio has exceeded 120% of GDP. Additional household support or tax cuts are difficult to realize due to fiscal soundness concerns and Republican opposition. Moreover, with next year's presidential election approaching, there's significant political burden to implement large-scale stimulus measures. Ultimately, they have no choice but to wait for natural adjustment through market mechanisms.
Third, without solving structural problems, short-term stimulus effects are expected to be limited. Root causes like income inequality, rising housing costs, and medical cost burdens are difficult to solve with short-term policies alone. Especially, import price rise pressure from tariff policies is expected to continue for a while, so low-income groups' living cost burdens won't easily decrease. In this situation, consumer recovery will inevitably proceed slowly, and companies' earnings weakness will likely be prolonged. Eventually, the current stock market rise will have to face corrections when earnings deterioration becomes full-scale.
Due to policy tool limitations and structural problem complexity, economic recovery may take longer than expected.
4️⃣ In Conclusion
The current US situation shows a stark contrast of "financial markets celebrating while ordinary people suffer." While stock markets are rising due to Fed rate cuts, clear weakness signals are appearing in the consumer sector that makes up 70% of the economy, creating a worrisome long-term situation.
The biggest problem is that this gap is likely a structural change rather than a temporary phenomenon. Wage growth is slowing while living costs keep rising, especially essential expenses like rent and utilities pressuring household budgets. Added to this, import price increases from tariffs are rapidly worsening purchasing power for low-income and middle-class groups.
The ripple effects of consumer weakness are also serious. Companies that serve as barometers of ordinary people's economy - Walmart, Target, McDonald's - are all complaining about poor earnings, showing the seriousness of the problem. These companies' earnings deterioration could soon lead to job cuts, risking acceleration of consumer weakness in a vicious cycle.
Limited policy response capacity is also concerning. Even if the Fed lowers rates further, real income problems won't be solved, and it might only inflate asset market bubbles. Fiscal policy is also difficult to implement additional stimulus measures with massive existing debt.
Particularly noteworthy is the widening consumption gap between income levels. High-income groups are increasing consumption with stock investment gains, but low-income and middle-class groups are significantly cutting spending due to living cost burdens. This imbalance threatens economic growth sustainability.
Ultimately, the current stock market rise is likely a "house of cards" without real economy support. When consumer weakness leads to company earnings deterioration and starts affecting employment and income, financial markets will also find it hard to avoid corrections. Investors shouldn't be fooled by flashy stock gains and should more carefully examine the real economy's fundamental strength.
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