Strong spending is obscuring an economy that isn’t working for many Americans
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Even after years of inflation, geopolitical chaos and recession in Europe, the US economy remains robust and resilient.
The reason for that is mostly the American consumer, with spending accounting for about 70% of gross domestic product.
But some observers now worry that the economy represents a tale of two Americas. Some businesses and consumers continue to thrive, while others are falling by the wayside.
What’s happening: Economic activity in the US remains relatively strong, but there are some signs that the momentum is beginning to cool. Unemployment rose to 3.9% last month, lower-income consumers are spending less and businesses are limiting employee hours and pay.
Consumer growth in general is beginning to moderate, but gently.
“That may mask more pronounced financial difficulties for the bottom three income quintiles facing the strenuous combination of higher prices, larger interest burdens and softening job prospects,” said EY chief economist Gregory Daco in a note on Tuesday.
While consumer balance sheets are still holding strong in aggregate — the US has added $40 trillion in wealth since the start of 2020, and Americans haven’t stopped spending —not every balance sheet looks the same.
“The economy is bifurcated into the haves and have-nots, as middle class Americans are struggling with rising prices and lagging wage growth,” said Skyler Weinand, chief investment officer at Regan Capital in a statement.
This earnings season exemplifies that growing divide.
McDonald’s (MCD) reported that people of all income levels are seeking value. Starbucks (SBUX) said that customers are becoming more particular about where they spend their money. Mondelez (MDLZ) executives discussed an increase in price sensitivity in their earnings call.
A recent survey by Santander Bank of its customers found that while inflation fears have largely subsided, middle-income Americans are pessimistic about the economy. About 60% believe the US will enter a recession in the next 12 months, and 62% are making significant cuts to their household spending, the bank found.
“It’s well known that the lowest income consumer is really struggling with inflation, but from a purely economic standpoint, it is the higher quintiles of earners that do the most spending,” Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds, told my colleague Bryan Mena.
Why it matters: There are many shapes to a recession.
Some economists have speculated that the US has been in a so-called “rolling recession” where only certain sectors of the economy are impacted. But there are also recessions that mostly hurt lower-income Americans.
A K-shaped recession is what happens when separate communities are hit by and recover from economic downturns at varying rates.
Some parts of society may experience renewed growth while others continue to lag behind. While the recovery from the 2020 recession can be described as V-shaped, many point out that it was actually two-pronged. Low-income Black and Hispanic families saw the fastest depletion of their savings during the pandemic, for example.
Many who worked in white-collar jobs recovered quickly as the government handed out stimulus payments and as stocks and home prices appreciated. Those without savings and who worked service jobs continued to suffer. Employees receiving the lowest wages were the most likely to lose their jobs in nearly every sector of the economy between 2020 and 2021, according to data from the Bureau of Labor Statistics.
Those Americans could still be suffering, but their stories are obscured by data that paints a broad picture of a resilient economy.
What’s next: That bifurcated economy, wrote Daco, will lead some businesses to succeed while others struggle. It “will also lead to conflicting inflation signals with some sectors experiencing outright deflation and others experiencing persistently elevated inflation,” he said.
That could make it a lot more difficult for Federal Reserve officials to decide whether to lower interest rates or keep them steady during their next few policy meetings. There’s a danger that if monetary policy is too strict, it could quickly make financial conditions tougher, said Daco.
“This, along with growing concerns about the country’s financial direction, might cause businesses and consumers to pull back on spending and investment,” he said.
Jamie Dimon could step down sooner than expected. Here’s who could run the country’s biggest bank
JPMorgan Chase CEO Jamie Dimon has bumped up his retirement plans, the longtime head of America’s largest bank said Monday.
Dimon is one of the most well-known and closely listened to CEOs in the world. Over the course of his tenure at JPMorgan Chase, he’s become somewhat synonymous with the largest US bank by assets.
But Dimon can’t lead forever, and at 68 years old, the question of succession has grown more important.
The timetable for stepping down — which he has long joked was “five years away” any time the question was put to him — is “not five years anymore,” Dimon said at the bank’s investor conference this week.
Dimon, who has led the bank since 2006, said that while “I still have the energy I’ve always had, I think when I can’t put on the jersey … I should leave.”
Succession plans at the bank, he said, are “well on the way.”
Shares of the company’s stock sold off after Dimon’s announcement, closing 4.3% lower.
“We believe that it will take time for the street to gain comfort with the next CEO and [Monday’s] stock reaction was evidence of that,” wrote Bank of America analysts in a note on Tuesday. “Dimon has delivered unparalleled shareholder returns during his tenure as CEO while navigating the bank through some major macro-economic crises.”
The Bank of America analysts forecast that Dimon will step down in late 2025 or 2026, but the specifics of JPMorgan’s succession plans have been the subject of speculation on Wall Street for many years.
Earlier this year, some of the bank’s top executives were moved into new roles in order to expand their experience.
The bank appointed Marianne Lake as the sole CEO of the consumer division, an area previously run by both Lake and Jennifer Piepszak.
Piepszak, meanwhile, now leads the company’s newly combined commercial and investment bank with her co-CEO Troy Rohrbaugh. Rohrbaugh is the former head of trading and securities services for the bank.
Other potential successors include Mary Erdoes, CEO of asset and wealth management; chief financial officer Jeremy Barnum and president and chief operating officer Daniel Pinto.
In 2020, Dimon experienced an “acute aortic dissection” — a tear in the inner lining of the aorta blood vessel — requiring surgery. Then co-COOs Gordon Smith and Daniel Pinto led the company in his absence.
Smith retired from the bank in January 2022.
Microsoft thinks it has found a way to make PCs relevant again
Microsoft jumped headfirst into building artificial intelligence directly into its Windows operating system on Monday, announcing new AI computers that could help ramp up flagging PC sales.
The developments push the company closer to its long-time goal to “build computers that understand us versus us having to understand computers,” CEO Satya Nadella told the audience at the company’s annual developer conference at its Redmond, Washington headquarters.
“I feel like we’re really close to that real breakthrough,” he added.
The computers, which are packed with processors that power advanced AI tools, come as PC sales have stalled for years. The company hopes the new machines will boost sales and revive excitement, particularly as AI is expected to become increasingly part of everyday life.
Microsoft’s new lineup of Copilot+ PCs, which feature a new Surface Pro tablet and Surface laptop, include AI tools that don’t require internet connection — the AI processing occurs directly on the device
The new hardware runs on OpenAI’s new GPT-4o technology, which aims to turn ChatGPT into a digital personal assistant that can engage in real-time, spoken conversations and interact using text and “vision.” Announced last week, it can view screenshots, photos, documents or charts uploaded by users and have a conversation about them.
The new hardware also plays up Microsoft’s existing AI assistant called Copilot, which works across various products, including Bing and Microsoft 365. It can help with tasks such as writing, keeping track of emails in Outlook or designing presentations in PowerPoint.
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