Despite facing high prices, retail spending in the US has remained robust, primarily driven by wealthier consumers who have experienced significant increases in income, home equity, and stock market wealth, the Associated Press reports.
Federal Reserve research indicates this shift in consumer spending patterns marks a departure from pre-pandemic trends and suggests that spending will continue to support economic growth this year and next.
While lower-income households grapple with rising costs for essentials like rent and groceries, limiting their ability to spend on discretionary items such as electronics and dining out, wealthier households have been buoyed by substantial gains in their assets. Although inflation-adjusted incomes for lower-income consumers are beginning to recover, experts believe it could take years for their financial situations to return to pre-pandemic levels.
This disparity in spending capabilities helps clarify the current gap between negative consumer sentiment and the positive indicators of a healthy economy, a dynamic that has implications for the upcoming presidential election. The growth seen in government economic data is largely fueled by a smaller segment of the population.
Recent reports from the Commerce Department reveal that US retail sales rose by 0.4% from August to September, indicating strong consumer confidence. Restaurant sales also increased by 1%, reflecting consumers’ willingness to spend on dining out. The Federal Reserve Bank of Atlanta estimates that the economy grew at a robust 3.4% in the July-September quarter.
Wealthy households have significantly benefited from rising housing and stock market values since the pandemic. Home equity for this group has surged by 70% since early 2020, totaling $17.6 trillion, while their stock and mutual fund wealth has increased by 86% to nearly $37 trillion. These wealth gains have alleviated the need for affluent Americans to save from their paychecks, allowing them to maintain or increase their spending.
The Fed’s analysis shows a marked shift in spending patterns since the pandemic, with upper- and middle-income consumers outpacing lower-income groups. By August 2024, inflation-adjusted retail spending was nearly 17% higher for upper-income households (earning over $100,000) compared to January 2018, while middle-income households saw a 13.3% increase. In contrast, spending for those earning less than $60,000 rose just 7.9% in the same period, and even declined between mid-2021 and mid-2023.
While lower-income Americans have faced pressure to cut back on discretionary spending, some individuals still struggle with high costs. Helaine Rapkin, a 69-year-old teacher, expressed her concerns while shopping for discounts, noting that many items have become increasingly expensive.
Experts like Michael Pearce from Oxford Economics highlight the financial strain on lower-income households, indicating that rising housing and food costs have limited their spending options. The share of discretionary spending among the lowest-income Americans has dropped, contrasting sharply with the spending habits of wealthier households.
Despite the challenges faced by lower-income consumers, economists believe that the overall economy will remain resilient. Karen Dynan, an economist at Harvard, notes that while there are signs of strain among some consumers, these issues do not present a widespread economic crisis. Both Dynan and Pearce maintain a positive outlook, suggesting that as inflation-adjusted incomes continue to rise, spending will increase, supporting economic growth moving forward.
Pearce concludes that the most intense pressures on consumer spending are likely behind us, leading to a strong outlook for future economic activity.
