We're always taught, and always talk about, how everything in macro is linked.

For instance, earnings and inflation, or interest rates and investment, or, the focus of this note, the labour market and personal consumption.

The commonly held belief is that the stronger and tighter the labour market is, the more impressive consumption growth is likely to be. That's easily explained - a well-performing labour market not only brings greater job stability (improving consumer confidence), but also higher wagers (increasing disposable incomes).

While that theory is logical, the US economy is right now testing whether it holds water, as the labour market seems in fragile shape, yet consumer spending, and by extension economic growth more broadly, continue to hold up well. How can this be?

Well, in a ‘K-shaped’ economy like the US is increasingly becoming, such a backdrop is again relatively easy to explain. Spending is largely being accounted for by higher earners, with Moody’s noting that in 2025 half of all US consumer spending was accounted for by just the top 10% of earners.

At these income levels, it is not necessarily developments in the labour market at large which change the propensity to spend, but the ‘wealth effect’. In many ways, higher earners, who are often also asset rich, have never had it better, with the stock market printing record highs on a regular basis, plus property and land prices having also surged, resulting not only in increased confidence, but also increased spending.

In other words, it isn't shifts in the labour market that determine how the US consumer spends, and by extension how the economy at large grows; it is, instead, developments in asset markets.

There are four implications of this, to my mind.

Firstly, it is possible to have a solid pace of economic growth, and a faltering labour market, despite conventional wisdom. The ‘C’ part of the GDP calculation is propped up by spending in higher income brackets, while the ‘I’ part is aided by oodles of AI-linked capex and a little manufacturing re-shoring to boot.

Secondly, such a concentration of spending among the ‘asset rich’ raises downside growth risks in the event of the equity market starting to roll-over as, in such an event, a negative ‘wealth effect’ would likely lead to a rapid pullback in spending among those currently propping things up, thus leading to broader economic growth headwinds.

Thirdly, given the potential for such an ugly, and potentially self-reinforcing feedback loop to emerge, the ‘K-shaped’ nature of the economy actually strengthens the ‘Fed put’ structure, as I explained in a note last year, with policymakers having a strong incentive to ensure asset prices, and thus broader economic momentum, remain underpinned.

Finally, were the US labour market to go from one which is presently faltering and bending, to one which starts to re-accelerate as the impact of the Fed’s ‘insurance’ cuts begins to be felt, there are significant upside risks to the broader economic outlook, as the bottom part of the ‘K’ play catch-up, and a pick-up in spending among lower income brackets helps move the economy towards a more reflationary backdrop.

In case you hadn't already figured it out, all this is clearly an incredibly favourable backdrop for risk assets, with the path of least resistance for equities continuing to lead firmly to the upside for now. Such a reflationary, scenario, meanwhile, is also a favourable backdrop for the dollar, and could see the G10 FX space return to the heady days of ‘buying growth’ and ‘US exceptionalism’.