Last week saw dramatic moves in financial markets. Gold and silver, which rose very sharply last year and in January, suddenly lurched down before stabilizing. Bitcoin took a nosedive before achieving a significant, although partial, recovery on Friday. Mega-cap tech stocks posted huge earnings gains but announced even more lofty capital spending plans, contributing to a general selloff in the sector. And, at the end of the week, stocks saw a resounding rally, pushing the venerable Dow Jones Industrial Average over 50,000 for the first time ever.
There is clearly plenty of froth in the market. However, there is also plenty of liquidity which appears to be preventing, at least for the time being, any correction from evolving into an outright bear market.
Last week’s economic news was less dramatic but may be equally important in the long run. The data are, it must be acknowledged, distorted, delayed and incomplete, reflecting the impacts of frigid weather and a short-lived partial government shutdown.
Nevertheless, the most recent numbers suggest a very sluggish economy. Growth should pick up over the next few months as consumers receive significant tax refunds and, potentially, so-called “tariff rebate checks”. But in the meantime, the January data show how this economy performs in the absence of stimulus sugar. It is an economy of soggy consumption, weak job gains and a sour public mood. This, in turn, reflects two underlying problems – an absolute decline in the number of working-age Americans and a relative decline in the well-being of most Americans compared to more affluent households.
Public discontent could fade in the months ahead, but it may reassert itself later in the year, leading to a resumption of divided government after the November elections. This, in turn, would likely reduce the chances of further fiscal stimulus, potentially dampening growth, inflation, interest rates and financial asset returns over the next twelve months.
Consumer Weakness and its Causes
We expect Tuesday’s December retail sales report to show a moderate 0.2% gain following a solid 0.6% increase in November. These numbers should indicate roughly 3.0% annualized growth in real consumer spending in the fourth quarter.
However, the first quarter appears to be off to a rocky start.
- January light-vehicle sales were 14.9 million units annualized, the lowest monthly sales rate in over three years and down sharply from a 15.7 million fourth-quarter average.
- Air travel numbers in January, as reported by TSA, were flat while hotel occupancy rates were down about 1% year-over-year.
- Traffic of potential home-buyers remained very weak according to the National Association of Home Builders, and,
- Consumer confidence, as measured by the Conference Board fell to its lowest level in over a decade while the University of Michigan Index, although up over the past three months, is lower than it has been over 90% of the time in the last 48 years.
On the jobs front, we will get the delayed January employment report this Friday. While we expect a soft payroll job gain of 52,000 following an equally uninspiring 50,000 increase in December, these numbers are not measured with precision and a surprise in either direction is quite possible. That being said, recent job market indicators have generally suggested a lack of momentum:
- The Labor Department reported last week that job openings fell from 6.928 million in November to 6.542 million in December and now stand at their lowest level in five years. This trend appears to have continued into January according to the monthly jobs report published by the National Federation of Independent Business.
- In the Conference Board confidence survey, the gap between those describing jobs as “plentiful” versus “hard to get” fell to its lowest level since February 2021.
- The admittedly volatile ADP report showed private sector job gains of just 22,000 in January compared to a downwardly revised 37,000 in December.
- Meanwhile, the number of announced layoffs, as compiled by Challenger, Gray and Christmas, spiked to 108,000 in January 2026, more than double the number of a year earlier.
It should be emphasized that this last statistic may be a little misleading since initial claims for unemployment benefits suggests a continued low level of layoffs. A more accurate description of the labor market is one of low hiring, low firing and low growth and this picture should be confirmed in Friday’s report.
In short, while the stock market is booming and tech sector capital spending is soaring, much of the real economy remains very slow. Winter weather will have distorted some of these numbers and we expect a pickup over the next few months as consumers spend refunds and, possibly, tariff rebate checks. Still, in the absence of continued fiscal stimulus, (which the federal finances can ill afford), underlying consumer spending and economic growth appear to be pretty sluggish. So what’s the problem?
Demographic Drags and Inequality Implications
In short, there are two major issues: The working-age population is shrinking and the median American family is not doing nearly as well as the richest.
On the first problem, the Census Bureau released new estimates last month, documenting a slowdown in immigration. Specifically, they estimate that, in the year ended July 1st, 2025, net immigration was 1.262 million and the total population grew by 1.781 million, or 0.5%, down from net immigration of 2.734 million and total population growth of 3.249 million, or 1.0%, a year earlier. However, crucially, they noted that net immigration fell sharply over the course of the latest year so that, when projecting out to the year ended July 1st 2026, they expect net immigration of only 321,000, leading a total population gain of just 835,000, or 0.2%.
While they have only published these top-line numbers for the current year, these estimates are very close to the assumptions they used in their “low-immigration” scenario, published in November 2023. In that forecast, they assumed net immigration of 389,000 in the year ending this July and they outlined what that would mean for population growth at every age level. Making some minor adjustments to line these numbers up with their current forecast suggests that, if their projections from two weeks ago are correct, the population aged 18 to 64 is now falling by 20,000 every month.
This has important implications for consumer spending, housing, inflation and the labor market. On the consumer side, it suggests diminished demand for consumer staples and relatively stagnant demand for housing. This is likely one of the reasons for a gradual increase in the rental vacancy rate, which, according to the Census Bureau, rose to 7.2% in the fourth quarter of last year – its highest level since 2017. This will impede any robust recovery in home-building.
However, it should also help to reduce inflation. The same Census survey that showed rising vacancies reported rents on vacant units falling to their lowest level in over two years. This softness in rents, if it persists, will have a major impact in reducing inflation going forward, given the importance of rent and owners’ equivalent rent in the CPI. We still think that year-over-year CPI inflation will rise above 3% by the middle of the year but it could fall to close to 2% by the end of 2026, given this weakness in rents.
On the labor market, a steady decline in the working age population is slowing the growth in employment – in a close-to-full-employment economy, you can’t add many jobs while shrinking the number of available workers. However, it will also limit any increase in the unemployment rate. The labor market today isn’t strong but it is tight and the unemployment rate could well end 2026 below its current 4.4%.
The other issue impacting consumer spending is the concentration in gains in income and wealth. Unfortunately, we don’t have real-time data on income inequality – the latest numbers are from 2024. However, they show a continuation of a long-trend of rising inequality dating back to the mid-1980s.
One way of thinking about this is to look at the difference between the average American household and the median American household. Statistically, the average is found by summing up total income and dividing by the number of households. The median simply refers to the experience of the household at the 50th percentile.
If income was evenly distributed, or even symmetrically distributed across society, then median income would be equal to average income. However, in a society where a few households are doing very well and the vast majority have much more modest incomes, the median is below the average. In 2024, the median pre-tax income of American households, excluding capital gains and non-cash benefits such as health benefits, was $83,700 while average income was 45% higher, at $121,000. This gap, in percentage terms, has been rising steadily for many decades – in 1967, for example, average income was only 12% higher than median income. One result of this is that, while in real terms, average household income increased by 0.9% per year in the first 25 years of this century, median household income increased by just 0.6%.
There are, of course, many causes for this rising inequality. A booming stock market and rising property prices have helped richer households, as has more favorable tax treatment. Increasing numbers of college graduates has coincided with K-12 problems across the country, leading to a rising wage gap between those who have been able to take advantage of educational opportunities and those who have not. And, increased automation and foreign competition have severely reduced manufacturing as a pathway to a comfortable income.
As in the case of weaker demographics, while rising inequality is not currently hurting the stock market or tech spending, it is dampening the demand for basic goods and services and housing. Moreover, one result of rising inequality is that most Americans feel that the economy is not working for them. This shows up in consumer confidence surveys. However, it also showed up at the ballot box in 2024 and is generally agreed to be the single biggest reason for the election of the current administration.
It could also show up in this November’s mid-term elections. On average, over the past 10 mid-term elections, the party occupying the White House has lost an average of 22 seats in the House of Representatives. With the current House majority standing at five seats, the odds favor a return to Democratic control in the next Congress.
If this occurs, then the administration may find it very difficult to push through further stimulus before the 2028 presidential election. In this scenario, even if the tech capital spending boom continues, the economy is likely to settle back to a path defined by its demographic and income inequality challenges. This is a path of slow GDP growth, low unemployment and falling inflation. This raises the possibility of some further Fed easing in 2027, helping the bond market. However, it also increases the importance of diversification, particularly if these real economy challenges are amplified by any faltering in the artificial intelligence boom.