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.
Contrary to conventional wisdom, a stronger renminbi would exacerbate China's deflationary pressures. This would harm corporate revenues, leading to wage cuts and negatively impacting consumer spending. Therefore, currency appreciation would make the desired economic rebalancing towards consumption more difficult.
While markets are excited about Germany's fiscal stimulus, its economic impact will be a drawn-out process. Implementation delays, lags in defense procurement, and potential capacity constraints mean the positive effects on growth will materialize over the medium term, not as an immediate boost.
While AI drove 2025 CapEx, a broader business investment recovery depends on a cyclical upswing in demand. This requires consumer spending to broaden beyond the wealthy, directly linking corporate investment growth to the improved financial health and real income growth of low- and middle-income households.
A rapid, broad adoption of AI could significantly boost productivity, leading to faster real GDP growth while simultaneously causing disinflation. This supply-side-driven scenario would present a puzzle for the Fed, potentially allowing it to lower interest rates to normalize policy even amid a strong economy.