Is the US Economy Really Being Driven by Consumers Anymore?

Whenever we talked about the American economy, the first thing everyone mentioned was consumer spending. It was the bedrock, the engine—with consumption making up about 70% of the GDP, that narrative made perfect sense . But here's the thing: while you still hear stories about widening wealth gaps where affluent individuals keep spending while middle- and lower-income earners struggle, the structural driver of the US economy has fundamentally shifted . It’s an almost counterintuitive turn, and one that many investors might be missing.

What’s interesting is that the current economic momentum isn't coming from shoppers maxing out credit cards; it’s being fueled by a massive surge in investment, the first of its kind in 45 years . We're talking about huge capital injections driven by the race for ai and related competitive advantages, which is really propping up growth right now . From my experience watching market cycles, a shift this profound means the old rules of thumb—like judging health purely by retail sales—just don't apply anymore, and that changes everything about how we look at market resilience. If we realize the economy is now investment-centric, it also changes how sensitive we are to the cost of borrowing.

This leads us to a critical point: investment, by its nature, is usually financed by borrowing, not spare cash . Think about the big tech bubbles and valuation worries we saw late last year, concerns surrounding giants like Oracle and Open ai, which often boiled down to whether these massive, investment-heavy firms could ultimately service their enormous debt loads . If interest rates climb, those companies that borrowed heavily to fund their growth suddenly face crushing burdens, completely stifling the very investment that is now driving the economy . Therefore, understanding the current market means understanding that low rates are absolutely essential to sustain the investment boom, which puts immense pressure on political and monetary figures to keep borrowing costs manageable.

Why is the Federal Reserve Obsessed with Your Job Status, Not Just Inflation?

When we think about central banks hiking rates, the immediate assumption is always inflation—prices are too high, so they tighten the reins, right? But here's a subtle trap: while controlling basic inflation is always the goal, maintaining economic stability, especially ahead of a major election (like the US intermediate elections on November 3rd), means balancing price stability with growth . Simply getting inflation down isn't enough; the economy also needs to feel good to the average person, which usually means the job market has to be strong.

However, a consistently improving economy, with robust growth, traditionally demands higher interest rates—not lower ones . This creates a deeply ironic tension: political pressure often necessitates keeping rates low initially, even with the understanding that they might have to rise later, just to keep the economic mood positive and investment flowing . This suggests that the biggest source of future market instability, the true Achilles’ heel, isn't necessarily inflation figures themselves, but rather the interest rate environment . Despite all the liquidity pumped into the market by policies, it's the eventual reckoning with interest rates that will determine whether all this monetary expansion ends positively or negatively.

This brings us to the surprising fact about what truly triggers the Fed to raise rates: it’s not a slight uptick in prices, but a confident confirmation of a strengthening job market . The key indicator they monitor is employment, specifically the non-farm payrolls, because poor employment means people can't afford goods, forcing prices down naturally . Therefore, when employment starts showing significant improvement—like two to three consecutive months of strong non-farm employment figures—that’s the moment the market will react violently, because it signals that the central bank is forced to pivot and begin raising rates, regardless of political preference . When this policy pivot happens, the downward trajectory of rates we've seen reverses suddenly, causing a sharp, painful market adjustment.

Could a Tariff Ruling Cause the Next Financial Earthquake?

Let’s talk about a major legal threat looming over US fiscal stability: the Supreme Court’s decision on tariffs. Traditionally, the power to impose taxes, including tariffs, rests with the legislative branch—Congress . Yet, past administrations have used specific laws, like the International Emergency Economic Powers Act (IEEPA), to unilaterally impose tariffs on broad groups of nations, effectively using them as a means to supplement the federal budget.

Here's the scary scenario: if the Supreme Court rules that these presidential tariffs were illegal, then legally, the government would have to refund every dollar collected—and all future tariffs would be instantly invalidated . This enormous fiscal gap would immediately force the US Treasury to issue significantly more national debt (more Treasury bonds) to plug the hole . I've found that when the supply of government debt floods the market, bond prices fall, and because bond prices and interest rates move inversely, this action alone would cause interest rates to spike, undermining the low-rate environment needed for the current investment-led economy . This would be profoundly disruptive, hurting heavily indebted households and especially the big tech firms that rely on cheap borrowing.

What’s truly counterintuitive, though, is how the real-world impact might be limited, even with an adverse ruling. Even if the court declares the tariffs unlawful, it doesn't mean the money will actually stop flowing immediately. I’m skeptical that trading partners like Japan, South Korea and others will immediately refuse to pay the existing duties, especially with a strong, unpredictable administration in power. The sheer political pressure—the fear factor—might lead many countries to simply maintain the existing 15% tariff agreements to avoid escalating tension, regardless of the legal precedent. Thus, while the legal framework suggests a disaster—leading to the issuance of more debt and higher rates—the practical outcome might be much more constrained, offering a layer of protection we don't anticipate.