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Consumer spending has been unexpectedly boosting the U.S. economy for almost a full year.
But exactly who does the spending is changing. And that raises new questions about the next phase of this economic expansion.
Households in the top quintile, or top 20% of income earners, accounted for 45% of all consumer spending from 2020 to 2022, according to a new report from economists Morgan Stanley released late last month. Since 2004, this group has typically accounted for 45% of consumer spending. He represents nearly 39% of all expenditures.
So the question now is: What will slow or stop this wealthy class from spending?
The Morgan Stanley team has some ideas in this regard.
Historically, wealthy people have cut back on spending when the value of their financial assets declines, such as when stock prices fall, as they did after the tech bubble, or when real estate values fell, as they did during the 2008 financial crisis.
As readers are well aware, stock and home prices have soared since 2019, but Morgan Stanley expects the latter to stall next year.
“Our outlook is that consumption among high-income groups will slow as the post-COVID-19 boom period for services recovery moves further away,” said Sarah Wolf, an economist at the firm.
“And in fact, our analysts covering restaurants and luxury brands both point out that aspirational (middle-income) consumers are starting to cut back on spending on fine dining and luxury shopping. As wealthy households approach satiety as well, aggregate consumer spending will shift toward “more rapid step-downs, widespread white-collar layoffs, and [a] Significant losses in wealth, particularly in housing, are key. ”
On the other hand, it is good that consumer spending is resilient. As an example, take the first estimates of third-quarter GDP released on October 26th.
This spending also supports demand for goods and services, helps the job market hold up, and is a key reason the economy is not (yet) in recession.
On the other hand, this robust spending is one of the factors contributing to sustained inflation, hitting low-income households even harder.
As McDonald's (MCD) CEO Chris Kempczinski pointed out during the company's earnings call this week, “One of the things we've seen across the industry is the so-called sub-$45,000 From the industry's perspective, low-income consumers are experiencing an economic disadvantage. ”
So wealthy consumers appear to be doing well. Low-income consumers are hurting. These are dynamics that many investors are already predicting.
But what weighs on low-income consumers doesn't necessarily cause big spenders or the economy as a whole to suffer.
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