The economic theory that rising asset values boost spending is flawed. It ignores 'mental accounting'—people treat different types of wealth differently. A rise in home value leads to almost zero increased spending, while a cash windfall from a stock sale or lottery win is spent freely. The source of wealth dictates its use.

The resilience of consumer spending, despite weak employment growth, is driven by affluent consumers liquidating assets or drawing down cash. This balance sheet-driven consumption explains why traditional income-based models (like savings rates) are failing to predict a slowdown.

Despite a still-growing labor market, real wage growth has slowed to "stall speed." This lagged effect on middle and lower-income households is the primary driver for the projected 2-percentage-point drop in real consumption growth for Q4 and Q1.

Unlike debt defaults that can trigger systemic financial crises, a stock market collapse primarily impacts the real economy. It reduces household wealth, which in turn curtails consumer spending. While painful, this wealth effect is a different and less systemically dangerous channel than a widespread credit event.

Real consumer spending is up only 1% year-to-date (non-annualized), which annualizes to a weak 1.5%. This is a significant slowdown from the typical 2-2.5% growth in previous years, indicating that consumers are substantially pulling back their expenditures.

The top 10% of earners, who drive 50% of consumer spending, can slash discretionary purchases overnight based on stock market fluctuations. This makes the economy more volatile than one supported by the stable, non-discretionary spending of the middle class, creating systemic fragility.

The economy is now driven by high-income earners whose spending fluctuates with the stock market. Unlike historical recessions, a significant market downturn is now a prerequisite for a broader economic recession, as equities must fall to curtail spending from this key demographic.

Aggregate US consumer strength is misleadingly propped up by the top 40% of upper-income households, whose spending is buoyed by appreciating assets. This masks weaknesses among lower- and middle-income groups who are more affected by inflation, creating a narrowly driven economic expansion.

While headline forecasts predict a 3.5% rise in holiday sales, this is nearly entirely offset by inflation, which is running close to 3%. In real terms, consumer spending will be flat at best, meaning the average family's standard of living is declining this holiday season.