No. of Recommendations: 14
Consumer spending represents 70% of the U.S. economy.
The middle class are those earning from two-thirds to double the median household income, which is currently just shy of $81,000 a year, according to federal data. If we define the middle class as income quintile 3 and 4 they represent 40% of all consumer spending.
https://apolloacademy.com/wp-content/uploads/2024/...The poor and working class spend most or all of their money on necessities. The top quintile can afford plenty of discretionary purchases.
The temper of the middle class has a tremendous impact on the Macro economy. A pullback in spending by the middle class can (and has in the past) cause a recession.
https://www.wsj.com/economy/consumers/the-middle-c...
The Middle-Class Vibe Has Shifted From Secure to Squeezed
After months of tracking high-income earners’ positive economic outlook, America’s middle-income households appear to be losing confidence
By Katherine Hamilton and Alison Sider, The Wall Street Journal, 8/31/2025
For the American middle class, it has been a summer of cooling confidence.
Consumer sentiment dropped nearly 6% in August, after trending up in June and July, according to a closely watched index from the University of Michigan. Pessimism about the job market increased, with more people surveyed saying they expect their income to decline, according to polling done by think tank the Conference Board.
The middle class—generally considered to include households making roughly $53,000 to $161,000 a year—is playing an outsize role in that waning optimism. Pew Research Center defines “middle class” as those earning from two-thirds to double the median household income, which is currently just shy of $81,000 a year, according to federal data.
After months of tracking high-income earners’ increasing confidence about the economy, households making between $50,000 and $100,000 made an abrupt about-face in June. They now more closely resemble low-income earners’ gloomier views, according to surveys done by Morning Consult, a data-intelligence firm. ... [end quote]
https://www.sca.isr.umich.edu/
University of Michigan Surveys of Consumers
by Director Joanne Hsu
Consumer sentiment confirmed its early-month reading, moving down about 6% from July. Sentiment now stands about 11% above readings from April and May but remains at least 10% below 6 and 12 months ago. This month’s decrease was visible across groups by age, income, and stock wealth. Moreover, perceptions of many aspects of the economy slipped. Buying conditions for durable goods subsided to their lowest reading in a year, and current personal finances declined 7%, both due to heightened concerns about high prices. Expectations for business conditions and labor markets contracted in August as well. That said, expectations for personal finances held steady this month, albeit at relatively subdued levels relative to a year ago....
Year-ahead inflation expectations moved up from 4.5% last month to 4.8% this month. This rise was seen across multiple demographic groups.... [end quote]
The Conference Board's Index of Leading Economic Indicators has been improving. GDP growth was 1.3% in 2Q25. However, Real Gross Domestic Product growth was only 0.8% in 2Q25 due to inflation. (Continuously Compounded Rate of Change, Seasonally Adjusted Annual Rate.) This is a very slow rate of growth that could easily be tipped into recession. However, the Atlanta Fed's GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 was 3.5 percent on August 29, up from 2.2 percent on August 26. So GDP could surprise to the upside.
Inflation is taking a bite out of household budgets. The real bite of tariffs will be coming into play in the third quarter and the critical pre-holiday buying in the fourth quarter. Inflation is still higher than the Federal Reserve's goal of 2.0% even before the tariffs. The Cleveland Fed's Inflation Nowcast is predicting core inflation in 3Q25 to be over 3%.
Quarterly annualized percent change
Quarter CPI Core CPI PCE Core PCE Updated
2025:Q3 2.94 3.11 2.89 3.06 08/29
Federal Reserve Chair Jerome Powell has repeated many times that the worst situation would be for inflation expectations to become "entrenched" in the public because that could cause the inflationary spiral we saw in the 1970s.
President Trump is putting extreme pressure on Powell to slash the fed funds rate despite higher inflation. Trump is gradually packing the FOMC with his own flunkies.
https://www.nytimes.com/2025/08/31/business/how-tr...
Trump’s Plan to Pack the Fed With Loyalists
Overhauling the central bank’s Board of Governors would grant the president greater sway over an institution that is supposed to be independent from the White House.
By Colby Smith, The New York Times, Aug. 31, 2025
A watershed legal battle over the White House’s attempt to oust a sitting Federal Reserve governor has only just begun, but if President Trump gets his way, it could leave him with much more latitude to steer the central bank’s decisions on interest rates and its oversight of Wall Street.
Mr. Trump is already relishing the idea.
“We’ll have a majority very shortly,” Mr. Trump said at his latest marathon cabinet meeting about the Fed’s powerful seven-person Board of Governors. “So that’ll be great.”
Mr. Trump plans to appoint loyal individuals to that board, and he would need to fill just one more seat for the balance of power to tip further in his favor. If that happens, it would give the president immense sway over an institution that is supposed to operate independently from the White House.... [end quote]
Federal Reserve governor Lisa Cook, who has not been charged with any crime or convicted of any wrongdoing, filed a lawsuit on Thursday against Mr. Trump seeking to retain her position after Trump summarily fired her on a possibly bogus charge of mortgage fraud. Hers would be the critical seat to give Trump a majority on the Fed's Board of Governors.
If Trump gets his way and the fed funds rate is cut money will become cheaper and both inflation and the asset markets will rise.
But money is already very loose. The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows a flood of loose money. I wrote about this last week.
https://discussion.fool.com/t/what-is-money-what-i...The Shiller P/E ratio for the S&P 500 based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), is 39 compared with the historic median of 16.
Money is flooding into all the asset markets -- stocks, bonds, precious metals -- at the same time. Junk bond spreads are falling.
The stock market's upward trend continues. The Fear & Greed Index is in Greed. The risk is neutral since stocks and junk bond prices are rising at the same rate as the U.S. 10 year Treasury. USD has stabilized. Gold and silver are on a tear. Oil has risen to the top of its channel. Bitcoin is falling but it may be noise (establishing a channel?).
The Treasury yield curve is telling us something interesting. The yield of T-bonds under 10 years are falling but the 30 year T-Bond is not. This is true even of TIPS which are inflation-adjusted. Buying a 30 year bond is a huge risk during these uncertain times because the value of any 30 year bond will fall 20% if interest rates rise 1%. The bond market is showing that near-term rates may fall because the Fed will cave to Trump. But the overwhelming debts of the U.S. government will push yields higher over the long term.
The Macroeconomic picture in 2025 is in extraordinary flux. It's impossible to say where the trend will stabilize. Market traders are saying that the Fed will cut rates and the markets will boom. I think that inflation is inevitable but Trump may force the BLS to falsify the published inflation statistics.
The METAR, as always, is a short-term forecast.
The METAR for next week is sunny.
Wendy
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