Where's the prosperity? Middle class Americans aren't feeling it.

Middle-class consumer confidence has sharply declined, with the University of Michigan index falling to 55.4 and middle-income sentiment dropping from 113.2 to 98.7, contrasting sharply with positive views among high-income earners. Retailers like Walmart and Kohl's confirm this bifurcation, reporting middle- and lower-income customers are reducing spending and trading down, while higher-income consumers remain resilient. This trend underscores a growing two-tiered economy where the top 10% of earners, who have benefited substantially from asset inflation, now account for 49% of consumer spending, making economic stability increasingly dependent on their market-sensitive wealth.

Analysis

A significant bifurcation is evident in the U.S. economy, with consumer sentiment and spending patterns diverging sharply across income levels. While high-income consumers (earning >$100k) remain confident, with a Morning Consult index at 121.5, middle-income sentiment has collapsed from a peak of 113.2 to 98.7, below the neutral 100-point mark. This anxiety is corroborated by corporate commentary from retailers like Walmart (WMT) and Kohl's (KSS), who report middle- and lower-income shoppers are reducing spending and trading down to cheaper goods. Conversely, Dollar General (DG) notes an influx of these same consumers. This consumer-side weakness is driven by a confluence of negative factors, including persistent inflation that has eroded real wages over the past five years and a softening labor market, evidenced by a rise in unemployment to 4.3% and a net job loss of 13,000 in June. In stark contrast, the wealthiest 10% of Americans, who own nearly 90% of stocks, have benefited immensely from rising asset values and now account for an unprecedented 49% of all consumer spending. This creates a precarious economic dependency on a small, wealthy cohort whose spending is highly correlated with asset market performance, posing a systemic risk should stock prices decline.

Key Decisions for Investors

• Consider a barbell strategy in the consumer sector, favoring discount retailers like Dollar General that benefit from trade-down behavior while exercising caution with mid-market retailers like Kohl's that are heavily exposed to the financially squeezed middle class.
• Closely monitor asset prices and high-end consumer spending as leading indicators for the broader economy, as the top 10% of earners now represent nearly half of all consumption, making their market-sensitive behavior a critical risk factor.
• Pay heightened attention to labor market data, such as job openings and unemployment claims, as further weakness will directly impact the middle-class consumer and could signal a deeper-than-expected economic slowdown.