This is a trend that surprises many. Why do Americans continue to spend at a brisk pace in retail stores and restaurants, despite the pressure of high prices?
One of the main reasons is relatively simple. That's because wealthier consumers are increasingly driving spending, driven by significant increases in income, home equity, and stock market wealth.
This trend, evidenced by the Federal Reserve's research, signals some change from before the pandemic.
And it suggests that consumer spending, the main driver of the U.S. economy, could help maintain healthy growth this year and next.
In contrast, low-income consumers have been disproportionately squeezed by higher prices for rent, groceries, and other necessities, and are spending more on discretionary items like appliances, entertainment, and restaurant meals than before the pandemic. I am no longer able to do that.
Spending is starting to recover as inflation-adjusted revenues rise, but it could take years for the public finances to fully recover.
This disparity helps explain the gap between gloomy consumer sentiment and broader evidence of the health of the U.S. economy. This is a major development in the presidential election, which is currently in its final week.
Only a small portion of the American population is supporting most of the growth evident in government economic data.
The trend also illustrates how the economy has continued to expand at a steady pace, even as the Federal Reserve kept its key interest rate at the highest level in more than 20 years until last month. Helpful.
Inflation-adjusted personal consumption spending rose 3% in 2022 and 2.5% in 2023, even though the Fed's interest rate hikes significantly increased borrowing costs for mortgages, auto loans, and credit cards.
And last month, the government announced that the number increased at an annual rate of 2.8% in the April-June period.
On Thursday, the Commerce Department reported that U.S. retail sales rose 0.4% from August to September, suggesting shoppers feel confident enough in the economy to continue spending freely. It was a steady growth.
Restaurant sales increased 1%. This is a particularly encouraging sign as it means many people felt able to spend money on meals outside the home.
The Atlanta Fed currently estimates that the economy grew at a strong 3.4% in the July-September period.
Since the pandemic, high-income households have been strengthened by significant increases in housing and stock market wealth.
Home values have been steadily rising, supported by high demand and an unusually low housing supply.
And the stock market is consistently hitting new highs, with the S&P 500 index up a blistering 22.5% for the year.
Approximately 80% of the stock market value is owned by the wealthiest 10% of households in the United States.
“This speaks to the continued strength of Americans, who are still supporting overall spending,” said Michael Pearce, principal deputy U.S. economist at Oxford Economics.
Over the past four years, home and stock values have soared, especially for the richest 10th of Americans.
The value of their homes jumped 70% from the first quarter of 2020 to the second quarter of this year, to $17.6 trillion, according to Federal Reserve data.
Their stock and mutual fund assets soared 86% to just under $37 trillion.
Although inflation has eroded some of these gains, they are still significant.
This rapid increase in wealth has reduced the need for wealthy Americans to save from their paychecks while increasing their spending.
Before the pandemic, retail spending was growing at about the same pace across all income groups, according to a report last week by Federal Reserve economists.
But about three years ago, the trend changed. High- and middle-income consumers started spending at a much faster pace than their lower-income counterparts.
By August 2024, inflation-adjusted spending on retail goods among high-income households with incomes of $100,000 or more was nearly 17% higher than in January 2018.
Spending among middle-income households earning between $60,000 and $100,000 a year rose 13.3% over the same period, according to the Federal Reserve. Additionally, spending for people with incomes under $60,000 has increased by only 7.9% since 2018. It actually decreased from mid-2021 to mid-2023.
“Moderate- and upper-income households are fueling strong demand for retail goods,” Fed economist Sinem Hacioglu-Houk and two colleagues wrote.
Among those feeling pressure to spend wisely is a 69-year-old teacher who was shopping at Kohl's in Ramsey, N.J., last week looking for discounts on athletic clothing and gifts for his nephews, nieces and daughters. , including Helaine Rapkin.
Rapkin said the company is struggling with rising costs for a variety of items and is not seeing the benefit of much lower inflation.
“I don't feel well at all,” she said. “It's unbelievable how expensive things are…clothing and food.”
Pierce found in his research that low-income Americans have had to cut back on spending on discretionary items since the pandemic.
Inflation sharply increased the proportion of their income they had to spend on housing and food, leaving little for other purchases.
As a result, for the lowest-income fifth of Americans, those with incomes below $28,000, the share of spending on discretionary goods was lower through the second quarter of this year compared to 2019. decreased by 2.5 percentage points.
There was also a decline in the second-lowest fifth of households and the middle fifth of households. But for the richest fifth, the share of spending on discretionary purchases actually increased.
“This was obviously a huge shock to households, especially low-income households,” Pearce said. “What surprised me was how little was taken back.”
One sign of the hardship facing low-income consumers is that the percentage of borrowers who are delinquent on their credit card and auto loans has risen over the past two years to the highest level in nearly a decade. .
But Karen Dynan, a Harvard University economist and non-resident fellow at the Peterson Institute for International Economics, suggested such trends are unlikely to derail the entire economy.
“We're seeing more cracks in consumer spending,” she says. “But it's still not about the broader economy.”
Dynan and Pearce said they are optimistic that as inflation-adjusted incomes continue to rise, consumers across the board, including low-income earners, will continue to spend in the coming months, further restoring Americans' purchasing power.
“The worst and strongest pressure on spending from the inflation shock and rising interest rates has probably passed,” Pearce said. “Right now, I think the outlook is pretty strong.”
