AI Is Driving the Market Conversation. But What Drives the Economy?
I had a strange experience the other weekend.
I had some time to kill in the Tysons area and decided to pop into Tysons Corner Center. My last trip to a mall had been a very different experience, with more empty stores than shoppers. So, I was surprised to find Tysons packed. People were everywhere, and lines for fitting rooms were 10 plus people deep.
Granted, it was back to school shopping season and Virginia’s sales tax holiday, both of which certainly contributed. But walking through the mall got me thinking about consumers, the economy, and how different that picture can sometimes look from what we see in the stock market.
The market and the economy are often discussed as though they are the same thing. They aren’t. In fact, the connection between the two has become less direct over time. Research from J.P. Morgan shows that the correlation between S&P 500 earnings growth and U.S. economic growth was much stronger in the 1970s and early 1980s than it has been more recently. Source: J.P. Morgan Private Bank
That distinction feels particularly relevant today. The market conversation has been dominated by AI, technology stocks, and whether stocks can keep moving higher. Those things matter to investors, but they don’t necessarily tell us how the economy itself is doing.
So, what does?
A few factors are particularly useful to watch: consumer spending, jobs, inflation, and business investment.
Start With the Consumer
Consumer spending is what people spend on goods and services, from groceries and clothing to travel, health care, and housing. It accounts for roughly two thirds of U.S. economic activity, which is why economists watch it so closely. Source: Bureau of Economic Analysis
That is one reason this week’s earnings from companies like Walmart, Target, and Home Depot are worth watching. What they say about their customers may tell us more about the economy than what happens to the hottest AI stock that day.
Beyond whether these companies beat Wall Street’s expectations, what they tell us about their customers can offer a useful window into consumer spending.
Are people still buying discretionary items, or focusing more on necessities? Are they looking for lower prices and promotions? Are they willing to take on a home improvement project, or putting larger purchases off?
Spending Starts With a Paycheck
Consumer spending and employment are closely connected. When jobs are plentiful and wages are growing, households are generally in a better position to spend. When employment becomes less certain, spending often becomes more cautious.
That is why the monthly jobs report is worth watching. It provides a snapshot of the labor market, including how many jobs employers are adding, the unemployment rate, and what is happening with wages. Together, those numbers can offer some insight into the consumer’s ability to keep spending. Source: Bureau of Labor Statistic
Multiply those individual decisions across millions of households, and the effects make their way into restaurants, retailers, travel, housing, and other parts of the economy.
What Those Paychecks Can Buy
Wages only tell part of the story. What matters just as much is what those dollars can buy.
If wages increase 3% while the cost of living increases 4%, purchasing power has declined. (https://www.bls.gov/cpi/questions-and-answers.htm) This is also why lower inflation and lower prices are not the same thing. Lower inflation means prices are rising more slowly, not that groceries, insurance, or dinner out have returned to what they cost a few years ago.
Inflation also influences interest rates, which show up in mortgages, car loans, credit cards, and the cost for businesses to borrow money.
Businesses Are Spending Too
Consumer spending gets a lot of attention, but businesses also contribute to economic activity through hiring and investment.
This is where AI becomes part of the economic story, not just the stock market story. Companies are investing heavily in data centers, computer equipment, software, and power infrastructure to support AI. That spending is real business investment and contributes to economic activity. Source: Federal Reserve
The Market Is Important, But It Isn’t the Scoreboard
The stock market can tell us a lot about expectations. It tells us what investors believe companies may earn and be worth in the future and how optimistic or pessimistic they are willing to be today.
But it isn’t a real time report card on the economy. To understand what is happening in the economy, watch whether people have jobs, whether their wages are keeping up with inflation, whether they are still spending, and whether businesses are willing to invest.
That is a much more complicated story than whether the market was up or down yesterday.
Which brings me back to Tysons Corner.
A crowded mall certainly isn’t an economic indicator. But watching people wait 10 deep for a fitting room was a good reminder that underneath all the market headlines, the economy is ultimately driven by millions of much less exciting decisions. And sometimes those quieter signals are the ones worth watching.
