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Inside the Market The new economic numbers that suggest investors are right to be nervous

The U.S. economy is hot, but U.S. stocks aren’t. One reason for that apparent contradiction is that most American consumers are feeling only limited benefit from the mountain of stimulus that has been lavished on the economy.

The U.S. Department of Commerce said Monday that personal income rose 0.2 per cent in September from the previous month, a marked slowdown from earlier months. Meanwhile, consumption grew 0.4 per cent, and the personal savings rate dipped to 6.2 per cent, matching the lowest level since 2013.

Barring a sudden surge in wages, the latest numbers suggest that the effects of the massive tax-reform package passed by Congress last year are beginning to fade. If the economy does slow in the quarters ahead, U.S. stocks will face another headwind, on top of rising interest rates and trade tensions.

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“Slow income growth may not be stopping consumers right now, but it is likely to start doing so very soon,” Joel Naroff, president of Naroff Economic Advisors in Holland, Pa., said in his latest research note.

The figures published on Monday suggest that many American households are being pushed to the limit to finance their current spending. Given that high earners reap a large chunk of all income in the country, Mr. Naroff calculates that if the top fifth of income earners are saving just 12 per cent of their earnings – a conservative estimate based on history – the remainder of the population is saving nothing.

If the second-highest group is also managing to save at typical rates, the bottom 60 per cent of households must have a negative savings rate of nearly 6 per cent. In other words, they would appear to be running through their resources at a rapid clip to finance current consumption.

“We have yet to see any acceleration in wage and salary gains,” Mr. Naroff said. “Instead, the added spending seems to be coming from savings and there is simply no way that can continue much longer.”

Unless wages and salaries start heading higher, the United States is headed back to growth of 2 per cent to 2.5 per cent, Mr. Naroff argued. This would mark an abrupt slowdown from the 3.5-per-cent pace recorded in the second quarter of this year.

He is not the only one to see this slowing trend. Andrew Hunter of Capital Economics pointed to the modest gains in disposable incomes over the third quarter as a whole as “another indication that the recent strength of spending growth is unlikely to last much longer.”

A slower economy would reduce pressure on the U.S. Federal Reserve to keep hiking interest rates, but with inflationary pressures still rippling through the economy, policy-makers are likely to keep raising rates once a quarter until the middle of next year, Mr. Hunter said.

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Investors have every reason to be worried about the prospect of higher rates and slowing growth. Neither is good for stock prices.

Optimists have to count on a surge in wage growth to keep consumers buying and corporate profits healthy. This could happen if Republicans beat the current odds and keep control of both chambers of Congress in next week’s mid-term elections. If so, Donald Trump has promised a new middle-class tax cut of 10 per cent.

But that raises its own problems. The current tax cuts are likely to swell the federal deficits to nearly US$1-trillion next year, according to the Congressional Budget Office. Further cuts would only worsen the problem. Rising government deficits would likely drive interest rates much higher, adding to the pressure on stock prices.

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