Americans sure seem like they’re feeling wealthy enough to spend through tariffs

Back in April 2012, Paul Krugman eulogized the death of the "confidence fairy,” detailing how arguments that proponents of fiscal austerity used to justify their stances — that lower government would be more than offset by positive side effects from more optimistic consumers and businesses — had fallen flat.

Well. Guess who’s back.

The most recent nowcast from the Atlanta Fed suggests consumer spending will add nearly 1.5 percentage points to economic growth (quarter-on-quarter, annualized) in Q3, which would be its strongest contribution this year.

Bank of America aggregated credit and debit card data showed US spending up 2.8% year-on-year for the week ending August 30. From mid-May through the end of June, this was running close to flat.

US consumption is top-heavy. The top 40% of earners drive more than 60% of spending, and a recent Federal Reserve paper showed that the resilience of the US consumer since 2021 is thanks to those earning over $100,000.

As of the first quarter of this year, stock investments accounted for 22.4% of net worth, just off the all-time high it hit the quarter prior.

If we run with the following set of facts and assumptions:

US consumption is disproportionally driven by higher earners;

Higher earners are more likely to own stocks than lower earners;

Retail traders aggressively bought the dip in the US stock market;

Tariffs hurt the purchasing power of lower-income Americans more than higher-income earners;

The stock market is pretty much near all-time highs…

The conclusion that emerges is pretty clear.

The Takeaway

We can intuitively suspect that this wealth effect might be a pretty potent countervailing force to tariffs, which the Budget Lab at Yale estimated to be a $2,300 hit in after-tax terms to the average American household. It took confidence to buy the dip. That confidence was rewarded, as walk-backs on some trade levies and robust corporate earnings (in large part thanks to the AI boom) helped return the S&P 500 to all-time highs by June. That retail traders — also known as US consumers — were intense buyers of the downside in US equities relative to hedge funds means they disproportionately benefited from this recovery