The consumers powering US economic growth are increasingly those who are higher up the income ladder, and likely enjoying a wealth effect from asset-price gains, according to research by Federal Reserve economists.
In the two pre-pandemic years, average household consumption was growing at a similar pace across all income groups, the new Fed study of retail spending shows. But since then, spending patterns have diverged sharply.
In the initial Covid period through mid-2021, low-income households increased spending faster than others with the help of public stimulus programs. But their consumption fell back after the last pandemic checks went out, while middle- and especially higher-income Americans have powered ahead. Overall, since the start of 2018, high-earning households raised spending more than twice as much as the low-income group.
The findings cast new light on the robust US consumer demand over the last couple of years, which has surprised analysts and kept the economy growing at a faster pace than many had expected.
The Fed researchers find that Americans across income groups are able to spend more than they did six years ago. But they conclude that recent consumer resilience has been “driven by middle- and high-income households,” while lower earners pulled back and “only recently recovered to their mid-2021 levels of real average retail spending.” The data in the Fed paper is adjusted for inflation.
One possible driver of the divergence is that higher-income households are enjoying a “wealth effect” from gains in housing and stock markets, and also “receive more interest and investment income during periods of higher interest rates, all providing a stimulus for sustained level of spending,” the Fed economists Sinem Hacioglu Hoke, Leo Feler, and Jack Chylak write.
The Fed’s bottom-up study of retail spending is based on numbers provided by consumer data company Numerator, which collects receipts from a panel of 150,000 representative US households. The Fed researchers say that this dataset on household spending is overall a good match for the retail sales figures that come from businesses, boosting confidence in the distributional breakdown.
Analyzing the numbers by demographic segments, the researchers find that retail spending has been stronger among more educated workers — and again they find a divergence from the pre-pandemic years when the growth was more evenly distributed.
By housing status, the data show that renters, who tend to be lower-income, experienced the largest increase in retail spending at the onset of the pandemic, but now show the smallest overall gains since 2018.
Longer-term homeowners who had the opportunity to lock-in low fixed-rate mortgages in 2020 and 2021 have more disposable income to sustain higher spending on goods and food services. But the study finds that Americans who bought property since 2022 — likely paying a premium and taking on a higher debt-to-income ratio — are not sharing in the overall spending growth.
“Real retail spending for these recent-owner households has been declining since mid-2022 to the present, which corresponds to the time when they purchased their homes,” the Fed economists wrote.
