Wealthier Americans are driving retail spending and powering US economy

WASHINGTON — It’s a pattern that has surprised many: Why, despite being squeezed by high prices, have Americans kept spending at retail stores and restaurants at a robust pace?

One key rationale is a relatively straightforward one: Wealthier consumers, boosted by powerful gains in turnover, home stake and distribute economy riches, have increasingly driven the spending.

That pattern, documented by Federal savings research, represents something of a shift from the pre-pandemic period. And it suggests that customer spending, the primary driver of the U.S. economy, could assist sustain well growth this year and next.

Lower-turnover consumers, by contrast, have been disproportionately squeezed by higher-priced rent, groceries and other necessities, leaving them less able to spend on discretionary items, like electronics, entertainment and restaurant meals, than they were before the pandemic. Though their spending is starting to rebound as expense boost-adjusted incomes rise, it could be years before their finances fully recover.

The disparities assist explain the gap between gloomy customer sentiment and widespread evidence of a well U.S. economy — a major dynamic in the presidential race that is now in its final weeks. Only a portion of the American population is fueling most of the growth that is evident in government economic data.

The trends also assist demonstrate how the economy has managed to keep expanding at a solid pace even though the Federal savings, until last month, kept its key earnings rate at its highest level in more than two decades. Despite the much higher borrowing costs for mortgages, auto loans and capitalization cards that resulted from the Fed’s rate hikes, expense boost-adjusted customer spending rose 3% in 2022 and 2.5% in 2023. And it increased at a 2.8% annual rate in the April-June quarter, the government said last month.

On Thursday, the Commerce Department reported that retail sales in the United States rose 0.4% from August to September, a solid boost that suggested that shoppers are confident enough in the economy to continue spending freely. Restaurant sales jumped 1%, a particularly encouraging sign because it meant that many people felt they could spend on meals outside the home. The Federal savings lender of Atlanta now estimates that the economy grew at a powerful 3.4% in the July-September quarter.

Higher-turnover households have been fortified by huge gains in housing and distribute economy riches since the pandemic. Home values have marched steadily up, fueled by high demand and an unusually low supply of houses. And the distribute economy has been consistently hitting recent highs, with the S&P 500 index up a sizzling 22.5% for the year. Roughly 80% of distribute economy worth is owned by the richest 10% of U.S. households.

“It speaks to the ongoing strength of those Americans, which is still carrying overall spending,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics.

Housing and distribute values have soared in particular for the wealthiest one-tenth of Americans over the history four years. The worth of their home stake has leapt 70% from the first quarter of 2020 through the second quarter of this year, according to Fed data — to $17.6 trillion. Their distribute and mutual pool riches has jumped 86%, to just under $37 trillion. Though expense boost has eroded some of those gains, they are still quite substantial.

Such sharp growth in riches has reduced the require for affluent Americans to save from their paychecks while still ramping up their spending. A update last week by Fed economists found that before the pandemic, retail spending had been rising for all turnover groups at roughly the same pace. But about three years ago, the pattern shifted: Upper- and middle-turnover consumers started spending at a much faster pace than lower-earners.

By August 2024, expense boost-adjusted spending on retail goods was nearly 17% higher than it was in January 2018 for upper-turnover households, defined as those earning more than $100,000. For middle-turnover households — earning $60,000 to $100,000 — their spending rose 13.3% during the same period, the Fed study found. And for those earning less than $60,000, spending has risen just 7.9% since 2018. It actually fell from mid-2021 through mid-2023.

“Middle- and high-turnover households have been fueling the powerful demand for retail goods,” Fed economist Sinem Hacioglu Hoke and two colleagues wrote.

Among those who have felt pressure to spend cautiously is Helaine Rapkin, a 69-year-ancient educator who was shopping last week at a Kohl’s in Ramsey, recent Jersey, looking for discounts on athletic wear and gifts for her nephew, niece and daughter. Rapkin said she’s wrestling with higher costs on a range of items and isn’t feeling the benefits of a dramatically reduced expense boost rate.

“I am not feeling excellent at all,” she said. “I can’t depend how expensive things have gotten…Clothes or food.”

Pearce, in his own research, has found that since the pandemic, lower-turnover Americans have had to cut their spending on discretionary items. expense boost sharply increased the portion of their turnover that they had to spend on housing and food, leaving little for other purchases.

As a outcome, for the lowest-turnover one-fifth of Americans — those earning less than $28,000 — the distribute of their spending on discretionary items fell 2.5 percentage points by the second quarter of this year compared with 2019. It also declined for the second-lowest one-fifth of households and for the middle fifth. But for the wealthiest one-fifth, the distribute of their spending on discretionary purchases actually increased.

“This has clearly been a very large shock to households, particularly those at the lower complete,” Pearce said. “What surprised me is how little has been clawed back.”

One sign of the struggles that lower-turnover consumers have faced is that the proportion of borrowers who are behind on capitalization cards or auto loans has risen in the history two years to the highest levels in about a decade.

Karen Dynan, an economist at Harvard and a nonresident fellow at the Peterson Institute for International Economics, suggested, though, that such trends aren’t likely to derail the overall economy.

“There are increasing cracks in consumers’ spending,” she said. “But it’s not yet a broader economic narrative.”

Dynan and Pearce declare they’re optimistic that consumers overall — including lower-turnover ones — will keep spending in the coming months as expense boost-adjusted incomes keep rising, restoring more of Americans’ purchasing power.

“We’re probably history the worst, the most intense pressures on spending from both the expense boost shock and from rising earnings rates,” Pearce said. “Now, I ponder the outlook is pretty powerful.”

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AP Retail Writer Anne D’Innocenzio contributed to this update from recent York.