The robust consumer spending of wealthier Americans, which has been a key driver keeping the U.S. economy afloat, is showing signs of abating, posing concerns for the economic outlook as the holiday season approaches, according to Bloomberg reports. Several retailers, including Best Buy Co. and Lowe’s, have revised their spending forecasts downward in recent weeks.
Lowe’s, for instance, noted a “greater-than-expected pullback in DIY discretionary spending, particularly in bigger ticket categories.” Retailers catering to the upper middle class, such as Apple, Coach, and Nordstrom, have reported significant drops in sales over the past three months.
Wealthier Americans, defined as those earning at least $100,000 in annual household income, have been scaling back their spending since the summer, with a notable impact on physical goods and housing. This shift in behavior is a crucial concern as higher-income individuals traditionally play a significant role in sustaining the economy.
From 2020 to 2022, households in the top 20% of income have accounted for 45% of all consumer spending in the U.S., exceeding their typical share of around 39%. However, the recent trend suggests that thrifty behavior is climbing up the income ladder, as even wealthier households, despite holding onto excess savings from the pandemic, are becoming more hesitant to spend.
Factors contributing to this slowdown in spending include rising inflation, increasing interest rates, and cooling wage growth. While these high-earning individuals remain in a relatively comfortable financial position compared to lower-earning peers, the impact of prolonged elevated inflation and rising interest rates is affecting their perception of economic well-being.
As the U.S. Federal Reserve’s recent interest rate hikes begin to take effect, particularly impacting the affordability of housing, economists predict a potential shift in consumer spending behavior. Wealthier households, traditionally more likely to be homeowners, have benefitted disproportionately from the housing market but may now start slowing their consumption, contributing to a lower gear in aggregate consumer spending.
The higher credit card interest rates also pose a challenge, as high earners, while having income leftover after monthly expenses, appear more inclined to use this excess income to pay off past debt rather than engaging in new spending. This change in spending patterns among wealthier Americans introduces a new dimension of uncertainty to the economic landscape in the lead-up to the crucial holiday season.
