WASHINGTON – It’s a trend that has taken many by surprise: Why have Americans continued to spend at stores and restaurants at a robust pace despite the pressure of high prices?
One big reason is relatively simple: Wealthier consumers, boosted by strong increases in income, home wealth and stock market wealth, have increasingly driven spending.
This trend, documented by Federal Reserve Surveyrepresents something of a shift from the pre-pandemic period. And it suggests that consumer spending, the main driver of the U.S. economy, can support healthy growth this year and next.
Lower-income consumers, on the other hand, have been disproportionately squeezed by more expensive rent, groceries and other necessities, leaving them to spend less money on luxury items, such as electronics, entertainment and restaurant meals, than before the pandemic. Although their spending is starting to recover inflation-adjusted incomes rise, it could take years for their finances to fully recover.
The differences help explain the gap between gloomy consumer sentiment and widespread evidence of a healthy U.S. economy – a key dynamic in the presidential race now in its final weeks. Only a portion of the U.S. population is responsible for most of the growth shown in government economic data.
The trends also illustrate how the economy has managed to continue growing at a solid pace, even though the Federal Reserve has so far managed last monthkept its key interest rate at the highest level in more than two decades. Despite much higher borrowing costs for mortgages, auto loans and credit cards due to the Fed’s rate hikes, inflation-adjusted consumer spending rose 3% in 2022 and 2.5% in 2023. And in April, it rose 2.8 % on an annual basis. -June quarter, the government said last month.
On Thursday, the Commerce Department reported that retail sales in the United States increased increased by 0.4% from August to Septembera solid gain that indicated shoppers have enough confidence in the economy to continue spending freely. Restaurant sales rose 1%, a particularly encouraging sign as many people felt they could spend money on meals away from home. The Federal Reserve Bank of Atlanta now estimates that the economy has grown a strong 3.4% in the July-September quarter.
Higher-income households have been buoyed by huge gains in housing and stock markets since the pandemic. Home prices have been rising steadily, fueled by high demand and unusually low housing supply. And the stock market has taken constant hits new highlightswith the S&The P 500 index rose by a blistering 22.5% this year. About 80% of the stock market value is held by the richest 10% of American households.
“It speaks to the continued strength of those Americans, who still account for the total spending,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics.
Home and stock values have soared over the past four years, especially for the richest tenth of Americans. According to Fed data, the value of their home equity increased 70% to $17.6 trillion between the first quarter of 2020 and the second quarter of this year. Their assets in stocks and mutual funds have increased by 86% to just under $37 trillion. While inflation has eroded some of these gains, they are still quite substantial.
Such sharp growth in wealth has reduced the need for affluent Americans to save from their paychecks while still boosting their spending. A report from last week by Fed economists found that before the pandemic, retail spending had increased at about the same pace for all income groups. But about three years ago, the trend changed: upper- and middle-income consumers started spending money much faster than lower-income consumers.
In August 2024, inflation-adjusted spending on retail goods was nearly 17% higher than in January 2018 for higher-income households, defined as those earning more than $100,000. For middle-income households – those earning between $60,000 and $100,000 – their spending rose 13.3% over the same period, the Fed study found. And for those earning less than $60,000, spending has increased just 7.9% since 2018. These even decreased from mid-2021 to mid-2023.
“Middle- and high-income households have fueled strong demand for retail goods,” wrote Fed economist Sinem Hacioglu Hoke and two colleagues.
Among those who have felt pressure to spend carefully is Helaine Rapkin, a 69-year-old teacher who was shopping at a Kohl’s in Ramsey, New Jersey, last week, looking for discounts on sportswear and gifts for her nephew, niece and daughter. Rapkin said she is struggling with higher costs on a range of items and is not experiencing the benefits of dramatically reduced inflation.
“I don’t feel good at all,” she said. “I can’t believe how expensive things have become…Clothes or food.”
Pearce has found in his own research that lower-income Americans have had to cut back on discretionary spending since the pandemic. Inflation sharply increased the share of their income they had to spend on housing and food, leaving little for other purchases.
As a result, for the fifth of the lowest-income Americans - those earning less than $28,000 - the share of their spending on discretionary items fell 2.5 percentage points in the second quarter of this year compared to 2019. It also fell for the second quarter. -lowest one-fifth of households and for the middle fifth. But for the richest one-fifth, the share of their spending on discretionary purchases has actually increased.
“This has clearly been a very big shock to households, particularly those at the bottom,” Pearce said. “What surprised me is how little has been recovered.”
One sign of the problems lower-income consumers have faced is that the percentage of borrowers falling behind on credit cards or auto loans has increased over the past two years to the highest level in about ten years.
However, Karen Dynan, an economist at Harvard and a non-resident fellow at the Peterson Institute for International Economics, suggested that such trends will not derail the economy as a whole.
“More and more cracks are appearing in consumer spending,” she says. “But it is not yet a broader economic story.”
Dynan and Pearce say they are optimistic that consumers in general - including lower-income consumers - will continue to spend in the coming months as inflation-adjusted incomes continue to rise, increasingly restoring Americans’ purchasing power.
“We are probably past the worst, the most intense pressure on spending from both the inflation shock and rising interest rates,” Pearce said. “Now I think the prospects are quite strong.”
AP Retail Writer Anne D’Innocenzio contributed to this report from New York.
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