Consumers Aren’t Sweating Higher Rates

Robust consumer spending suggests that economic strength, rather than deteriorating fundamentals, is driving higher real yields, allowing equities to remain resilient.

• The retail sales control group rose 1.4% in August after declining in July, its strongest monthly gain since September 2024 and well above economists’ 0.4% expectation.
• This control group excludes automobiles, gasoline, building materials and food services, and feeds directly into the GDP estimate of consumer spending.
• Consumer spending represents about two-thirds of U.S. GDP growth, while August job growth was stronger than expected.
• The Atlanta Fed’s GDPNow model projected 5.1% real GDP growth for the third quarter, and the St. Louis Fed’s PCENow model projected 4.1% growth in real consumer spending.
• At the latest Fed policy meeting, no committee members identified downside risks to their GDP growth forecasts; risks were viewed as balanced or tilted upward.

Takeaway: Rising rates are being supported by a strong economy and corporate earnings rather than weakening demand, so equities should be able to absorb higher yields, although future performance is not guaranteed.