In a recent study conducted by Federal Reserve economists, it has been revealed that the driving force behind the current robust US consumer demand lies in the hands of higher-income households. While average household consumption growth was relatively uniform across all income groups in the years preceding the pandemic, a stark divergence has emerged in recent times.
Following the onset of the Covid-19 pandemic, low-income households initially saw a surge in spending thanks to government stimulus programs. However, as these programs tapered off, their consumption levels regressed. In contrast, middle- and high-income Americans powered ahead, buoyed by a wealth effect stemming from asset-price gains in housing and stock markets.
The data, adjusted for inflation, demonstrates that since the start of 2018, high-earning households have significantly outpaced their lower-income counterparts in spending growth. This has contributed to the surprising resilience of the US economy in the face of challenging times.
A key driver of this divergence appears to be the wealth effect experienced by high-income households, who benefit from various income sources such as interest and investment returns. Furthermore, the analysis by the Fed researchers, based on retail spending data from Numerator, indicates that more educated workers have also seen stronger growth in spending post-pandemic.
Examining spending patterns by housing status further illuminates the divide. Renters, who typically belong to the lower-income bracket, initially witnessed a spike in retail spending during the pandemic but now show minimal overall gains since 2018. On the other hand, longer-term homeowners with advantageous fixed-rate mortgages have enjoyed higher disposable incomes, facilitating sustained spending on goods and services.
Interestingly, the study reveals a concerning trend among recent homeowners who purchased property post-2022. These individuals, likely burdened with higher debt-to-income ratios, have experienced a decline in real retail spending since acquiring their homes. This underscores the nuanced and varied impact of economic factors on consumer behavior across different income and housing segments in the US.
Overall, the research sheds new light on the evolving consumer landscape in the US, emphasizing the central role played by wealth gains in shaping spending trends among households of varying income levels.