While the cost of living isn\u2019t going up nearly as fast as it did in 2022, consumer prices are still up 27% since the onset of the pandemic. <\/p>\n
(Bloomberg) — The surprising resilience of the US economy this year is masking underlying weakness among low- and middle-income households, as higher-income Americans continue to drive growth.<\/p>\n
This dichotomy between the haves and have-nots isn\u2019t new, but the economic strain is now bleeding from the lowest earners to the middle class, creating an even starker divide that some economists say makes the economy more susceptible to a downturn.<\/p>\n<\/p>\n
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The richest 10% of households are fueling nearly half of total US spending, thanks to a stock market surge that has boosted wealth and in turn propelled economic output this year. Meanwhile, lower-income families are pulling back in the face of tight budgets, still-high living costs and a raft of corporate layoffs.<\/p>\n
While the cost of living isn\u2019t going up nearly as fast as it did in 2022, consumer prices are still up 27% since the onset of the pandemic.Photographer: Spencer Platt\/Getty Images <\/p>\n
Executives at companies like Chipotle Mexican Grill Inc., Hilton Worldwide Holdings Inc. and Ethan Allen Interiors Inc. have cited the trend in recent earnings calls, and Federal Reserve Chair Jerome Powell said officials are carefully watching signs of a bifurcated economy after the central bank lowered interest rates last week.<\/p>\n
\u201cI feel like our economy today resembles a top-heavy Jenga tower,\u201d said Peter Atwater, the economist who, in 2020, popularized the idea of a \u201cK-shaped\u201d economy, where the well off are on an upward track and the less fortunate experience further declines.<\/p>\n
In the popular Jenga game, wooden blocks are stacked and then carefully removed by players until the tower becomes too fragile and collapses. The reference is apt as the stock market surges to fresh highs even as hiring stalls and layoffs creep up.<\/p>\n
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While the robust pace of growth has surprised economists, especially amid the Trump administration\u2019s significant policy changes, the divergence in spending \u2014 with an increasingly smaller group of people holding up the economy \u2014 is fueling concern that the US is becoming susceptible to a more pronounced slowdown.<\/p>\n
\u201cIt makes the economy highly vulnerable if anything goes off the rails for those high-income, high-net worth households,\u201d said Mark Zandi, the chief economist for Moody\u2019s Analytics.<\/p>\n
A downturn in the stock market \u201cwould knock the wind out of these high income households \u2014 the last pillars of strength in the economy \u2014 and raise the risks of recession,\u201d he added.<\/p>\n
Shoppers on Worth Avenue in Palm Beach, Florida.Photographer: Saul Martinez\/Bloomberg <\/p>\n
Economists recently surveyed by Bloomberg don\u2019t see a downturn on the horizon, and they don\u2019t project the unemployment rate rising much from its currently low level. But lower- and middle-income Americans are increasingly under strain.<\/p>\n
While the top fifth of earners now account for almost two thirds of spending \u2014 a record \u2014 the bottom 80%, which made up nearly 42% of spending before the pandemic, now accounts for just 37% of it, according to Moody\u2019s Analytics. Low- and middle-income shoppers are spending less on all sorts of merchandise like apparel and toys, especially since tariffs were announced earlier this year, data from research firm Circana show.<\/p>\n
\u201cWe have kind of a two-speed economy right now. Wealthier households are doing quite well, most of them, but low income households, many of them are struggling,\u201d Federal Reserve Governor Michael Barr said Thursday during a virtual event on community development. \u201cPeople are worried about whether if they lost their job, whether they might get a job in the future. And so we have to pay careful attention to making sure that the labor market is solid.\u201d<\/p>\n
Student loan payments have resumed and the ranks of subprime borrowers are on the rise, according to credit reporting firm TransUnion. Concerns about inflation \u2014 particularly for necessities like rent and groceries \u2014 persist, alongside slower pay gains, tepid hiring and more layoffs. And the shutdown has made matters worse for millions, with disruptions to food aid benefits and child care as well as spiking health insurance premiums.<\/p>\n
Meanwhile, the upper echelon is getting wealthier, thanks to stock market gains and rising home values. People who don\u2019t own those assets haven\u2019t been able to benefit from their drastic appreciation, which has helped offset inflation elsewhere.<\/p>\n
\u201cFor those at the bottom, a lot of things that were once viewed as part of the American Dream have become out of reach,\u201d Atwater said. \u201cThey\u2019re not only unaffordable, they\u2019re unattainable.\u201d<\/p>\n
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Companies are noticing shifts in buying habits. Grocery chain Kroger Co. said in September that low- and middle-income shoppers are using coupons more, buying cheaper store brands and eating out less. More affluent consumers are buying larger pack sizes, while those living paycheck to paycheck are chasing deals, Procter & Gamble Co. said last month.<\/p>\n
O\u2019Reilly Automotive Inc. has found its do-it-yourself customers are putting off bigger repairs. Even Apple Inc., which has long prioritized premium devices with hefty profit margins, is changing its stance to develop a low-cost laptop.<\/p>\n
Atlanta Fed President Raphael Bostic noted last week that some people are shifting from pre-portioned laundry detergent pods to powder or liquid, which can be rationed out in smaller amounts. But he cautioned that even as consumption is shifting, companies don\u2019t appear to be significantly concerned yet.<\/p>\n
Job seekers wait to speak with a recruiter for Margaritaville Beach Resort during the Mega JobNewsUSA South Florida Job Fair in September.Photographer: Joe Raedle\/Getty Images <\/p>\n
\u201cOur sentiment measures from business leaders, they all tell us they do feel like things are a little slower,\u201d Bostic said. \u201cBut slower is not necessarily the same as weak, or nonexistent or troubling. We\u2019re not hearing extreme words.\u201d<\/p>\n
It\u2019s not unusual to see some dichotomy in spending, and lower-income cohorts are always more sensitive to price increases. What\u2019s different this time around is that middle-income consumers are pulling back largely due to poor economic sentiment, whereas historically that hasn\u2019t happened until there were widespread job losses, said Michael Skordeles, head of US economics at Truist Advisory Services Inc.<\/p>\n
While the cost of living isn\u2019t going up nearly as fast as it did in 2022, consumer prices are still up 27% since the onset of the pandemic. That inflation psychology has left some \u201cscar tissue\u201d and selectiveness to spend, Skordeles said.<\/p>\n
The risk now is that what might be considered a \u201cnatural\u201d amount of inequality develops into something \u201cextreme\u201d and leaves the economy at large more vulnerable to duress, Diane Swonk, chief economist at KPMG, wrote in a note to clients last month.<\/p>\n
\u201cIt triggers discontent, social unrest and is more corrosive than conducive to growth,\u201d she said.<\/p>\n
–With assistance from Uma Bhat, Vince Golle and Amara Omeokwe.<\/p>\n
(Updates with comment from Federal Reserve official in twelfth paragraph.)<\/p>\n
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