Core Viewpoint - The U.S. economy is trapped in a "reflexive" loop where cost-cutting by companies boosts stock prices, which in turn stimulates consumer spending, thereby supporting corporate performance. However, JPMorgan warns that this asset price-driven resilience is unsustainable, as declining savings rates and weak income expectations weaken consumer momentum. A stock market downturn could quickly turn the current "buffer" into an amplifier of economic decline [1][3][19]. Group 1: Economic Dynamics - Companies are cutting costs through layoffs to enhance efficiency, which in turn raises stock prices. This stock price increase stimulates consumer spending, creating a cycle that supports corporate performance and economic resilience [3][17]. - JPMorgan's analysis highlights a "strange decoupling" where a deteriorating labor market coexists with strong household wealth growth, particularly in the U.S. [3][4]. - The wealth effect, driven by rising stock prices, temporarily compensates for the slowdown in labor income growth, but this consumption resilience is unlikely to last [3][10]. Group 2: Wealth and Consumption - Household wealth in developed markets has surged, with U.S. household wealth increasing at an annualized rate of 14.8% over the past two quarters, driven by stock market gains [7][10]. - The wealth effect is crucial for supporting consumer spending; for every dollar increase in wealth, households tend to spend an additional 3.5 cents [10]. Group 3: Consumer Confidence and Savings - Consumer savings rates have dropped to unsustainable levels, with a decline of about one percentage point since the first half of 2024, indicating that consumers are depleting savings to maintain spending [13]. - Consumer confidence is low, with median expectations for nominal income growth falling below 2.5%, and 68% of surveyed households believe their income growth will not keep pace with inflation, marking the most pessimistic outlook since 1975 [13][16]. Group 4: Risks and Future Outlook - The current economic balance is fragile; if the wealth effect diminishes and companies begin layoffs, the stock market could shift from being a buffer to an amplifier of downward pressure on the economy [19]. - JPMorgan's basic scenario anticipates a gradual recovery in the labor market, which would validate the current consumption model, but acknowledges the increasing risk of sustained labor market weakness [18].

Core Insights - The article discusses a non-typical "closed loop" in the U.S. economy, where corporate layoffs boost stock prices, which in turn stimulate consumer spending, creating a cycle that supports corporate performance and economic resilience [1][18] - This phenomenon is described as a Soros-style "reflexivity" loop, warning that it may lead to a bubble that could burst if the stock market, driven by AI, declines or consumer confidence collapses [1][18] Group 1: Economic Trends - Morgan Stanley's report highlights a "strange decoupling" between a deteriorating labor market and strong household wealth growth, particularly in the U.S. [1][2] - The employment growth in developed markets has significantly slowed, with the G4 group's employment growth rate nearing stagnation at 0.3% annualized by Q3 2025 [2] - Household wealth in developed markets surged over 10% annualized in the last two quarters, with the U.S. seeing a remarkable 14.8% increase [7] Group 2: Wealth Effect and Consumer Spending - The "wealth effect" is identified as a key driver of consumer spending, where households increase spending even without income growth, with an estimated additional spending of about 3.5 cents for every dollar increase in wealth in the U.S. [10] - Despite the temporary support from the wealth effect, indicators show that U.S. consumers are running low on "fuel" for spending, as personal savings rates have dropped significantly since mid-2024 [13] Group 3: Consumer Confidence and Economic Risks - Consumer confidence is declining, with median expectations for nominal income growth falling below 2.5%, and 68% of households believing income growth will not keep pace with inflation, marking the most pessimistic outlook since 1975 [13][18] - The current economic logic appears contradictory, as the resilience of the U.S. economy heavily relies on the continued prosperity of the stock market, which may not be sustainable given high valuation metrics [18] - Analysts warn that if the wealth effect diminishes and layoffs occur, the stock market could shift from being a buffer to amplifying downward pressures on the economy [18]