Strength in consumer spending has helped keep equities buoyant, even as other economic fundamentals have weakened. Markets are increasingly reliant on that trend continuing.

U.S. equities have gotten off to a strong start in September, mainly due to improvement in some worrisome geopolitical events, but also with the help of a new factor—the increasing focus of investors on U.S. consumer strength.

As global demand has fallen and the U.S. manufacturing sector has weakened—August manufacturing data came in much lower than economists expected last week—investors have come to rely more on the steady strength of U.S. consumers to defy recessionary forces.

I think investors should avoid blindly following recent positive market momentum and keep a close watch on economic fundamentals. I have a few concerns about the long-term health of the consumer. Here’s why:

  • Employment is a lagging indicator. U.S. labor markets have remained strong. Unemployment, at 3.7%, is at a 50-year low, and wages are growing at a healthy pace. However, I see signs that the job market could take a turn for the worse. Payroll growth is decelerating. Some business surveys, such as the Challenger Report and the Institute for Supply Management’s reports on employment in manufacturing and services sectors, show job cuts are up and hiring is down. With corporate profit margins already under pressure, companies may increasingly feel the need to cut costs. A healthy labor market is necessary for consumer spending to remain strong.

  • Consumer sentiment seems fragile. While confidence is still at a healthy level, it is trending lower. Even more telling, the gap between current and future expectations in key sentiment surveys has grown. At 87.4 points, the spread between the Conference Board’s measure of current conditions and the University of Michigan’s read on forward expectations is at a 20-year high. A gap this size has preceded recessions in the past.

  • Lower interest rates may not drive increased spending. I worry investors may be overly optimistic about the ability of future Federal Reserve interest rate cuts to drive increased borrowing and spending. It hasn’t been hard for consumers to obtain credit this business cycle, so making it easier may not have much impact. Witness how today’s near-record low mortgage rates have done little to reignite the housing market. Plus, rhetoric around the economy’s need for stimulus could cause consumers to feel more uncertain and spend less. 

Even though U.S. consumer spending remains strong, investors should remember that we are late in the current business cycle. Keep close watch on labor market data for signs of weakening, and resist the impulse to chase recent positive market momentum. To me, the early September upswing doesn’t seem grounded in reliable economic fundamentals.