US Economy’s Strength Hinges on How Much the Rich Spend

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Analysts at the Federal Reserve Bank of New York found that since 2023, inflation-adjusted spending grew most for higher-income consumers – while it was flat for the middle group, and declined for the lowest. Their work is based on receipts analyzed by Numerator, a market research firm.

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…And Companies Are Acting On It

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Whatever the data may show, plenty of US businesses have identified a shift — and taken action.

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For retailers, that might mean rethinking the map of their expansion plans, or revamping what’s on their shelves. Dollar Tree Inc., which estimates that about 60% of its customers last quarter earned at least $100,000, is expanding into wealthier neighborhoods. Walmart Inc., long known for its low prices, has renovated stores and introduced more high-end products to draw in higher earners.

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At airlines, there’s a race to revamp cabins so they have more premium seats, and offer other perks to the higher-end fliers who are driving revenue. Delta Air Lines Inc. reported double-digit growth in business travel at the start of this year. “We’re at the top end of that K, in terms of who our consumer is,” Chief Executive Ed Bastian told Bloomberg TV.

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But Everyone’s Better Off Now…

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Take the slightly longer view, some economists say, and things look more balanced. Coming out of the pandemic, low-paid workers scored the biggest pay hikes amid booming demand in places like restaurants – narrowing income inequality. Stimulus checks also helped many to pay down debt or boost savings. 

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All of this left most households in a more stable financial position and delivered benefits that have lasted, according to Matthew Klein, author of the Overshoot newsletter. “Everyone is better off,” he says. “I think that’s partly why we’ve had such a sustained expansion.”

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What’s more, house prices have also climbed substantially since the pandemic – and compared with stocks, those gains were spread more evenly. The hot housing market buoyed many middle-class families whose wealth is concentrated in their homes.   

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…There’s No Big Shift in Official Spending Data…

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One of the key arguments for the no-camp – advanced by economists like Antoine Levy at the University of California, Berkeley — is that the K-shape simply doesn’t show up in the only US government report to explicitly address the topic.

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Every year, the Bureau of Labor Statistics produces a Consumer Expenditure Survey, which breaks down households into income groups and shows what they buy. The downside is that it comes with a lag. Still, the latest data for 2024 showed the top 20% of households accounting for some 40% of spending – roughly the same as they were in 2011. The share for the bottom 20% also held steady around 9%.

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Other studies conclude that the rich-household share of spending has crept up over time, but don’t see a dramatic surge. A Dallas Fed analysis found the top 20% of earners accounted for 57% of consumption in the post-Covid years — up from 53% in the 1990s, but not a big enough shift to make the economy more fragile.

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…And Growth Isn’t Just In Stuff Rich People Buy

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If spending was increasingly skewed, you’d expect the fastest growth to be coming in the categories where rich households are the biggest buyers. That’s not what the numbers show, according to one argument that economists make against the K-shaped trend.

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Samuel Tombs and Oliver Allen at Pantheon Macroeconomics found that above-trend spending growth last year often came in areas like clothing and health care where low-income Americans account for a relatively large share of the total. In cars, by contrast – where the top 20% do about two-thirds of the spending – growth was sub-par. 

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It’s true that there’s been a divergence when it comes to sentiment about the economy, with lower earners increasingly pessimistic – but that hasn’t translated into actual spending behavior, according to the Pantheon team. “We see insufficient evidence to assert that consumption looks K-shaped,” they conclude. “The conventional wisdom is not always right.”

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—With assistance from Matthew Boesler.

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