America's wealthy have long been the driving force behind consumer spending in the United States, but they are now in retreat. d3sign
Robust consumer spending by wealthy Americans has largely kept the U.S. economy afloat, continuing to do better than many economists expected. Now, that spending may be on the decline, Bloomberg reports. And that's bad news for the U.S. economy as the holiday season approaches.
Many retailers, including Best Buy and Lowe's, have lowered their spending forecasts in recent weeks. Lowe's Chairman, President and CEO Marvin Ellison said on Tuesday that Lowe's is seeing “a larger-than-expected regression in DIY discretionary spending, particularly in large ticket categories.” Upper-middle-class retailers such as Apple, Coach and Nordstrom have seen sharp sales declines over the past three months, Bloomberg reported.
In fact, spending for people with annual household incomes of at least $100,000 has been subdued since the summer, said Kayla Brune, senior economist at decision-information firm Morning Consult. luck. According to Morning Consult research, this group is spending the least on goods and housing (while spending on experiences has held steady), at a higher rate than lower-income households.
This is important because wealthy Americans typically have more spare cash to spend to keep the economy on track. As Bloomberg explains, if they withdraw, that could be a bad sign. This is especially true in the current economic environment. A recent Morgan Stanley research note found that the wealthiest Americans “are experiencing an unprecedented surge in spending during the post-COVID-19 recovery.” In fact, from 2020 to 2022, the top 20% of income households will account for 45% of all consumer spending in the United States. This group typically accounts for about 39% of all spending.
“Frugal behavior is climbing the income ladder,” Morgan Stanley's memo says. Although middle- and upper-income households still have surplus savings from the pandemic, they are “less willing to spend it.”
Even high-income earners are not immune to the effects of inflation.
Despite strong economic indicators, survey after survey reveals that six-figure earners are struggling to keep the economy afloat amid years of high inflation and rising interest rates. There is. While lower-income workers benefit from larger income increases, wealthier Americans find themselves worse off.
“While this group enjoys a relatively comfortable financial situation compared to lower-income groups, there are challenges that could limit spending this holiday season, including a prolonged period of high inflation, rising interest rates, and slowing wage growth. “It's not completely immune to certain factors,” Brune said. He points out that although inflation has slowed, the cost of living is still higher than before, and more consumers are choosing not to buy when prices are high.
And the full effects of the US Federal Reserve's recent interest rate hikes have not yet been felt. economists say. Housing, in particular, remains unaffordable for many people, and the situation hasn't gotten this bad since the 1980s. The average family can't afford to buy a home, and those who were lucky enough to buy during historically low interest rates are now stuck in homes they don't really like. Wealthier households are more likely to be homeowners than lower-income households and have benefited disproportionately from the recent explosion in housing wealth, driving consumption. But Morgan Stanley expects that momentum to slow “as the post-COVID-19 service recovery boom moves further into the rearview mirror.”
“Our analysts covering restaurants and luxury brands all note that ambitious consumers are starting to cut back on spending on fine dining and luxury shopping,” the note said. “As wealthy households also approach fullness, total consumer spending will shift into a lower gear.”
Bruun said rising credit card interest rates are another problem. “Most high-income earners have some income left over after paying their monthly expenses, but they are more likely to use this excess income to pay down old debts rather than spend it on new expenses.” she says.
