Back on the cautionary beat

If you listen to Marketplace, read the FT, or follow lots of econ and finance nerds on Bluesky, this is probably old news to you. If not...

From the too-good-for-CNN Allison Morrow's Business Nightcap Newsletter.  

One way to think of the economy right now is like a big party on a roof deck your buddy Kyle built in college with little more than a hammer and a YouTube tutorial. It looks fine, and it’s been holding up shockingly well for the past five years. But now the party is getting crowded, the DJ is going wild, the keg is tapped and suddenly you zoom in on the pillars and see there are basically just two posts holding this thing up.

 

In our economy, those posts are called “Nvidia" and "rich people."

 

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When economists talk about “consumer spending” going up, it’s important to note they’re talking in aggregate. And right now, rich people are having such a good time, they’re skewing the data.

 

See here: The top 10% of wealthy people accounted for half of total spending in the second quarter, per Bloomberg News, citing an analysis by Mark Zandi, chief economist for Moody’s Analytics.

 

Think about that. Just 10% of the American consumer base is buying so much stuff, it accounted for half of all the spending in the economy. That’s a record. In the boom and bubble of the 1990s, high-income Americans accounted for about a third of overall spending, Bloomberg notes. 

 

Meanwhile, the middle- and lower-income tiers are leaning on credit cards to keep up with the cost of living. The national average credit score dropped by two points this year — the steepest drop since 2009, aka the peak of the Great Recession, my colleague Matt Egan wrote Tuesday. 

 

This is what economists call a K-shaped economy, which is a handy visual cue reflecting the upward trajectory of the upper class versus the downward trajectory of everyone else. 

 

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Yes, the stock market is clocking record highs, but it’s also got a concentration problem. The so-called Magnificent 7 (a handful of tech companies worth trillions of dollars apiece) now make up more than 30% of the value of the S&P 500. (Nvidia alone makes up about 8% of the index.)

 

Absent those juggernauts, the US stock market is more or less flat for the year.

 

 Add to that the previously noted fact that "Capex spending for AI contributed more to growth in the U.S. economy in the past two quarters than all of consumer spending" and the numerous indicators that we are in a bubble, and we have a situation that can turn very ugly very quickly.

 

AI hasn't reshaped our world, but the AI bubble certainly has.