In recent years, Wealthy Americans have been a driving force behind the robust US economy, their spending significantly contributing to economic growth. However, the days of lavish spending by those with deep pockets may be dwindling.
Despite high inflation and the Federal Reserve’s aggressive interest rate hikes, US household wealth saw a notable surge from 2019 through 2022. This increase, often referred to as “the wealth effect,” has been bolstered by a strong stock market and rising home values, according to a Federal Reserve report on household finances. The wealth effect has provided a cushion for many, enabling continued spending on travel, entertainment, and luxury items, which in turn has fueled economic growth.
The majority of this household wealth is held by Americans over the age of 54, who control more than 70% of the country’s wealth, according to Federal Reserve data. Many of these individuals also benefited from locking in low mortgage rates before the Fed’s rate hikes began in 2022, sheltering them from the current high mortgage rates.
However, recent economic indicators suggest a shift. April’s employment and retail spending figures fell short of expectations, signaling a slowdown in the economy’s momentum. While the job market remains strong, with unemployment below 4%, signs of caution among wealthy Americans are emerging.
Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds, highlighted this trend, noting that while low-income consumers have been visibly struggling with inflation, it is the higher earners who account for the bulk of consumer spending. “It’s well known that the lowest income consumer is really struggling with inflation, but from a purely economic standpoint, it is the higher quintiles of earners that do the most spending,” Jacobson told CNN.
Evidence of this cautious approach is visible in recent corporate earnings reports. British luxury retailer Burberry, for instance, reported a 40% drop in profits for the fiscal year ending in March, with a 12% decline in sales in the Americas. Similarly, LVMH Moët Hennessy Louis Vuitton noted a sharp decline in US demand for high-end liquors, leading to high inventory levels in its alcoholic beverages division.
Even Walmart, typically associated with lower and middle-income shoppers, reported that its recent gains were driven primarily by upper-income households, those earning over $100,000 annually.
Despite these indicators, the overall picture remains mixed. Royal Caribbean Cruises exceeded expectations for its first-quarter earnings, buoyed by strong bookings and onboard spending. This suggests that affluent Americans have not completely retreated from discretionary spending.
However, there is growing evidence that consumers are becoming more price-sensitive. The Federal Reserve’s Beige Book, which compiles anecdotal economic observations, noted increased price sensitivity among consumers. “When we talk to CEOs and CFOs, they’re saying that people are pushing back, so companies now aren’t feeling as comfortable pushing through price increases,” said Jacobson of Hartford Funds.
This cautious spending behavior extends beyond the wealthy to younger generations facing their own financial challenges. For instance, many Gen Z credit card users are struggling with debt. Ariel Barnes, a 28-year-old manager of gift processing at Jackson State University, has maxed out seven credit cards and is struggling to manage $30,000 in debt. Barnes’ situation reflects a broader trend, with 15.3% of Gen Z credit card borrowers having maxed out their cards, compared to 4.8% of Baby Boomers and 9.6% of Gen Xers.
As economic conditions remain uncertain, wealthy Americans are beginning to reassess their spending habits. This shift could have significant implications for the broader economy, given the substantial role that high-income consumers play in driving demand. Companies across various sectors are likely to feel the impact as they navigate this changing landscape and adjust their strategies to maintain profitability amid evolving consumer behavior.
In conclusion, while the wealth effect has buoyed the US economy in recent years, signs of a shift are evident as affluent Americans start to tighten their belts. This cautious approach, influenced by economic uncertainty and inflationary pressures, highlights the need for both consumers and businesses to adapt to a new economic reality. The forthcoming earnings reports and economic data will provide further insights into how this trend might unfold in the coming months.
