Wealthy Americans drive retail revenue and power the US economy

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WASHINGTON (AP) – It’s a trend that has surprised many: Why, despite pressure from higher prices, have Americans been spending at stores and restaurants at a steady pace?

One main reason is a relatively simple one: Wealthy consumers, boosted by strong gains in income, home equity and stock market wealth, have driven more spending.

That trend, documented by a Federal Reserve study, represents something changing from the pre-pandemic era. And it suggests that consumer spending, the main driver of the US economy, could help sustain healthy growth this year and next.

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Low-income consumers, in contrast, have been unfairly squeezed by higher rents, groceries and other necessities, leaving them less able to spend on the things they choose, such as electronics, entertainment and restaurant food, than before the pandemic. Although their spending habits are starting to pick up as inflation-adjusted earnings rise, it may take years before their finances fully recover.

The contrast helps to explain the gap between depressed consumer sentiment and widespread evidence of a healthy US economy – a major boost in the presidential race now in its final weeks. Only half of Americans are fueling the expansion seen in government economic data.

The trends also help show how the economy has been able to continue growing at a robust pace even though the Federal Reserve, until last month, kept its key interest rate at its highest level in more than two decades. Despite higher borrowing costs for mortgages, auto loans and credit cards caused by the Fed’s rate hikes, inflation-adjusted consumer spending rose 3% in 2022 and 2.5% in 2023. And it rose at an annual rate of 2.8% in the April-June quarter, the government said last month.

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On Thursday, the Commerce Department reported that retail sales in the United States rose 0.4% from August to September, a solid gain that suggests consumers are confident enough in the economy to continue spending freely. Restaurant sales jumped 1%, which is a very encouraging sign because it meant more people felt they could spend food outside the home. The Federal Reserve Bank of Atlanta now estimates that the economy grew by a robust 3.4% in the July-September quarter.

High-income households have been buoyed by huge gains in housing and stock market fortunes since the pandemic. Home prices have risen steadily, fueled by high demand and unusually low housing availability. And the stock market has been hitting new highs, with the S&P 500 index up an impressive 22.5% for the year. About 80% of the stock market value is owned by the richest 10% of US families.

“It speaks to the continued strength of those Americans, who are still spending money,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics.

Home and stock prices have risen especially for the richest 10 percent of Americans over the past four years. The value of their home equity rose 70% from the first quarter of 2020 to the second quarter of this year, according to Fed data _ to $17.6 trillion. Their stock and mutual fund wealth increased 86 percent, to just under $37 trillion. Although inflation has eroded some of those gains, they are still significant.

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Such sharp growth in wealth has reduced the need for wealthy Americans to save on their paychecks while still increasing their income. A report last week by Fed economists found that before the pandemic, retail spending was rising across all income groups at roughly the same pace. But about three years ago, the trend changed: High- and middle-income consumers began spending at a faster pace than low-income ones.

In August 2024, inflation-adjusted spending on retail goods was nearly 17% higher than it was in January 2018 for high-income households, defined as those earning more than $100,000. For middle-income families — earning $60,000 to $100,000 — spending increased by 13.3% over the same period, the Fed study found. And for those earning less than $60,000, spending increased 7.9% from 2018. It actually decreased from mid-2021 to mid-2023.

“Middle- and high-income households have been fueling strong demand for retail assets,” 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 last week at Kohl’s in Ramsey, New Jersey, looking for discounts on athletic wear and gifts for her niece, nephew and daughter. Rapkin said he is struggling with higher costs on a variety of things and is not feeling the benefits of a dramatically lower inflation rate.

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“I don’t feel very well,” she said. “I can’t believe how expensive things were found…Clothes or food.”

Pearce, in his research, found that since the beginning of the epidemic, low-income Americans have had to cut back on their spending on things they don’t see. Inflation greatly increased the portion of their income that they had to spend on housing and food, leaving little for other purchases.

As a result, for the lowest-income fifth of Americans – those who earn less than $28,000 – the share of money they spend on discretionary items decreased by 2.5 percent in the second quarter of this year compared to 2019. It went down a second time. -bottom one fifth of households and middle fifth. But for the wealthiest one in five, the share of money they spent on voluntary purchases actually increased.

“This has been a huge shock to families, especially those on the lower end of the spectrum,” said Pearce. “What surprises me is how little has been brought back.”

Another sign of the struggles low-income consumers have faced is that the number of borrowers behind on credit cards or auto loans has risen in the past two years to the highest levels in nearly a decade.

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Karen Dynan, an economist at Harvard and fellow at the Peterson Institute for International Economics, suggested, however, that such a trend would not affect the entire economy.

“There are growing gaps in consumer spending,” he said. “But it’s not yet a broad economic story.”

Dynan and Pearce said they are optimistic that consumers as a whole — including low-income earners — will continue to spend in the coming months as inflation-adjusted earnings continue to rise, returning more purchasing power to Americans.

“We’re probably past the worst, the most severe pressures on spending from inflation shocks and rising interest rates,” Pearce said. “Now, I think the idea is very strong.”

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AP Retail writer Anne D’Innocenzio contributed to this report from New York.

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