The US economy was fueled significantly for a full year by consumer spending, disproving the Cassandras.
From whom exactly, however, do these expenditures come and how long will this last, are questions that economists face with particular interest, because it concerns the next phase of this economic expansion.
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As for the first question, a new Morgan Stanley report published recently showed that the top 25% of income earners, i.e. households in the top 20% of income brackets, made just under half (45%) of consumer spending between 2020 and 2022. This percentage is considerably higher than the 39% in which it moved from 2004 to 2020.
So the big question is what could cause these rich people to slow down their consumption rates.
On top of that, Morgan Stanley economists note that historically the wealthy have reduced their spending pace when their financial assets lose value. This includes stock prices that can plummet, as in the case of the tech bubble, or real estate values plummeting, as during the 2008 financial crisis.
Source: yahoo finance
After 2019, stock and housing prices have risen sharply, which explains to some extent the increase in the share of the rich’s spending in total consumer spending.
According to Morgan Stanley economist Sarah Wolff, the baseline scenario will see consumption by the high-income group slow as the already large post-Covid recovery in services appears to be slowing.
More specifically, in the data processed by the bank’s analysts regarding restaurants and luxury brands, the average consumer’s tendency to withdraw spending on expensive meals and luxury purchases is reflected.
At the same time, they add, affluent households are also approaching saturation, causing overall spending to slow. The change will be even more pronounced as the effects of layoffs and loss of wealth, especially in housing, are reflected.
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On the data, experts point out that resilient consumer spending is desirable to begin with. The first estimate of US third-quarter GDP released on October 26 is indicative: consumer spending, which underpins demand for goods and services, is helping to hold down the labor market and serves as the main reason the economy is not (yet) ) fall into recession, according to yahoo finance.
On the other hand, this durable spending is one of the factors contributing to maintaining inflation, which hits lower-income households harder.
As McDonald’s ( MCD ) CEO Chris Kempczinski pointed out on his company’s earnings call this week, one of the realizations the entire restaurant industry has made is that it can’t rely on low-income consumers ($45,000 and below).
There is, however, a huge “but”. And that, experts warn, is that the damage to consumption from the weakness of lower incomes is much smaller than the footprint that the more affluent might leave on the economy in general if they were to cut back on consumption.