The resilient stock market may be keeping the economy out of a recession

Economic Overview - Consumer spending in August was stronger than expected, with a 0.6% increase, and spending adjusted for inflation rose by 0.4%, indicating resilience despite inflationary pressures [7][12] - The Dow Jones Industrial Average gained over 9% and the Nasdaq Composite rose 23% this year, driven by significant AI spending and strong performance from industrial and communications sectors [3][4] - Gross domestic product (GDP) grew at a 3.8% annualized pace in Q2, revised up by 0.5 percentage points, with the Atlanta Fed raising its Q3 GDP tracking estimate to 3.9% [11] Consumer Sentiment - Despite the stock market's rise, consumer sentiment has been declining, with a 23% drop since January, particularly affecting those without significant stock holdings [4][5] - The top 10% of earners in the U.S. own 87% of the stock market, which contributes to a disparity in economic sentiment among different income groups [5][6] Inflation and Federal Reserve Actions - The annual inflation rate remains above the Federal Reserve's 2% target, with core inflation at 2.9%, but monthly increases align with forecasts, suggesting a potential rate cut in October [8] - Concerns about stock market valuations persist, with the S&P 500 trading at 22.5 times expected earnings, significantly above historical averages [6] Economic Stability and Risks - Recent economic data indicates few recession pressures, with durable goods orders unexpectedly increasing and new home sales surging by 20% [12] - The economy is described as being on a "knife's edge," with high inflation and interest rates creating uncertainty, particularly for consumers not benefiting from stock market gains [13][14]