Consumer spending in the United States has witnessed a remarkable upswing since the economy began its rebound from the tumultuous era of the COVID-19 pandemic and subsequent shutdowns. An intresting revelation from a recent report by Morgan Stanley has shed light on the dominant role played by the top 20% of earners, or the highest quintile of households, in propelling this surge in consumer spending from 2020 to 2022.
Historically, this elite quintile has accounted for approximately 39% of all consumer spending from 2004 to the present day. However, the report unveils a significant spike in their contribution, now standing at a substantial 45% during the 2020-2022 period. This noteworthy shift prompts a pertinent question: what circumstances could lead this affluent cohort to curtail or halt their lavish spending habits?
Morgan Stanley, in its comprehensive analysis, outlined several potential scenarios. Traditionally, these affluent individuals tend to tighten their belts during recessionary periods when they witness a decline in their wealth, typically linked to plunging stock prices, as seen during the tech bubble burst, or real estate market crashes, such as the 2008 financial crisis. Notably, since 2019, both stock and home prices have maintained a steady upward trajectory.
The experts at Morgan Stanley contend that, in the absence of any significant real estate losses or significant stock market downturns, the coming year may witness a slowdown or cessation in spending by these opulent households, particularly as the “post-COVID services recovery” phase takes a backseat.
On the one hand, elevated consumer spending has contributed positively to the growth of the US Gross Domestic Product (GDP), reflecting a robust economic performance. However, this boom in consumption also has adverse implications, notably exacerbating inflationary pressures, which disproportionately affect lower-income households. McDonald’s CEO, Chris Kempczinski, emphasized this point during a recent earnings call, where he remarked that amid rising costs, “the low-income consumer… was negative from an industry standpoint.”
The wealthier segment of the population’s extravagant spending on goods and services currently stands as a driving force behind the expansion of the US economy. Nevertheless, the focus is now shifting towards the dynamics of spending patterns, particularly what factors might compel the affluent to curtail their expenditures. The decisions and behavior of these top earners are poised to define the next chapter in America’s ongoing economic recovery.
In summary, the robust consumer spending in the United States, particularly driven by the top 20% of earners, has been a significant contributor to the nation’s economic rebound post-COVID-19. Nevertheless, looming questions surround the sustainability of this trend and how factors such as stock market fluctuations or real estate market changes might influence the spending habits of this affluent cohort. The broader impact of this trend on inflation and the well-being of lower-income households remains a critical concern as the US economy continues to evolve.
Source: Yahoo Finance
