A noteworthy trend has emerged in the U.S. economy: Despite facing high prices, Americans continue to spend significantly at retail outlets and restaurants. This persistent spending is primarily driven by wealthier consumers who have benefited from substantial increases in income, home equity, and stock market wealth, according to Federal Reserve research. This shift represents a change from pre-pandemic behaviors and suggests that consumer spending, a crucial economic driver, could support sustained economic growth this year and next.
Conversely, lower-income individuals have been more heavily impacted by rising costs of essentials such as rent and groceries, limiting their discretionary spending on items like electronics, entertainment, and dining out. Although their spending is starting to recover as inflation-adjusted incomes rise, it may take years for their finances to fully bounce back.
These disparities illuminate the disconnect between consumer sentiment and the robust economic indicators and play a significant role in the current presidential race dynamics. It appears that only a segment of the population is contributing to the growth evident in government economic data.
The economy’s resilience, despite the Federal Reserve’s maintenance of its key interest rate at historically high levels until recently, further illustrates this trend. Even with increased borrowing costs, inflation-adjusted consumer spending rose by 3% in 2022 and 2.5% in 2023, along with a 2.8% annual increase in spending during the April to June quarter.
A recent report by the Commerce Department indicated that U.S. retail sales grew by 0.4% from August to September. Additionally, restaurant sales surged by 1%, signaling consumer confidence in the economy’s trajectory. The Federal Reserve Bank of Atlanta projects a strong economic growth rate of 3.4% for the July-September quarter.
Higher-income households have experienced significant wealth gains from housing and stock markets since the pandemic. Home values have increased steadily due to high demand and limited supply, while the stock market has consistently reached new heights, with the S&P 500 index rising by 22.5% for the year. Notably, approximately 80% of stock market value is owned by the wealthiest 10% of U.S. households.
Michael Pearce, Deputy Chief U.S. Economist at Oxford Economics, commented on the continued strength of affluent Americans driving overall spending. The wealthiest Americans have seen substantial increases in home equity and stock and mutual fund wealth since 2020, allowing them to sustain spending without heavily relying on their paychecks.
A Federal Reserve report highlighted that prior to the pandemic, retail spending increased at similar rates across all income groups. However, around three years ago, a shift occurred, with upper- and middle-income consumers increasing their spending much more rapidly than lower earners.
By August 2024, inflation-adjusted spending on retail goods had grown significantly more for upper-income households compared to lower-income ones, with increases of nearly 17% since January 2018 for upper-income households, 13.3% for middle-income households, and just 7.9% for lower-income households.
According to the Fed study, middle- and high-income households are driving the demand for retail goods. However, lower-income Americans, like Helaine Rapkin, a teacher from New Jersey, are feeling pressured by higher prices and are unable to enjoy the benefits of reduced inflation.
Pearce’s research indicates that lower-income Americans have been forced to cut discretionary spending due to inflation, which increased their outlay on housing and food, limiting other purchases. For the lowest-income Americans, the proportion of spending on discretionary items has decreased, while it has increased for the wealthiest.
Increased delinquencies on credit cards and auto loans over the past two years indicate the financial struggles faced by lower-income consumers. However, economist Karen Dynan of Harvard, along with nonresident fellow at the Peterson Institute for International Economics, believes these issues might not significantly disrupt the overall economy.
Dynan and Pearce express optimism, suggesting that consumers, including lower-income groups, will continue spending as inflation-adjusted incomes rise, restoring more purchasing power. Pearce comments that the most severe pressures from inflation and rising interest rates may be over, and the economic outlook remains promising.