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Rich Americans Are Starting to Spend More Carefully
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Americans with lots of money have played an increasing role in strengthening the U.S. economy with their spending. But her days of splurging like there’s no tomorrow may be coming to an end.
US family wealth has increased in recent yearsdespite the scourge of high inflation and the Federal Reserve’s bitter medicine of high borrowing costs to control price increases.
A robust stock market, coupled with rising home values, increased Americans’ wealth from 2019 to 2022, according to a Federal Reserve report on household finances. This increase is known as the “wealth effect” and has continued to bolster Americans’ finances as stocks break records and high beef bond yields open savings accounts.
More, Americans who secured a low mortgage rate before the Fed began raising interest rates in 2022 and decided to stay where they are were shielded the effects of high mortgage rates.
Taken together, this means that many consumers have not only managed to resist inflation to some extent, but have also managed to spend on trips, shows and expensive items. US economic growth accelerated at a rapid pace in 2023, largely thanks to the US consumer.
And it is Americans over the age of 54 who hold the vast amount of household wealth in the US, more than 70%, according to Fed data.
But the dynamism of the economy has slowed down a bit recently with figures on job and retail spending in April was weaker than expected. While While the overall economy remains healthy, including the job market with an unemployment rate of less than 4%, there are signs that a major turning point has been made. Changing the behavior of wealthy Americans is one of them.
“It’s well known that the lower-income consumer is really struggling with inflation, but from a purely economic standpoint, it’s the highest quintiles of earners who spend the most,” said Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds, to CNN.
There has been some evidence that wealthy Americans are becoming cautious in the latest round of corporate earnings results.
British luxury retailer Burberry reported last week that its profits fell 40% in the budget year that ended at the end of March. Sales in the Americas fell 12% over the year.
“Executing our plan in a context of slowing demand for luxury has been a challenge,” said Jonathan Akeroyd, chief executive of Burberry, in a statement.
Michael Kovac/Getty Images for Moët and Chandon/Archive
Moet, who recently reported falling demand, is seen at the 77th Annual Golden Globe Awards at The Beverly Hilton Hotel on January 5, 2020 in Beverly Hills, California.
LVMH Moët Hennessy Louis Vuitton reported in its latest earnings results last month that demand for high-quality alcoholic beverages has declined sharply in the US, leading to high inventory levels for the French luxury conglomerate’s alcoholic beverages division.
Walmart, which traditionally serves low- and middle-income Americans, even reported last week that its earnings in the last quarter were “driven mainly by high-income familiess”, or those who earn more than US$100,000 per year.
But the broader picture is not just one of doom and gloom. It’s been mixed: Royal Caribbean Cruises beat expectations for first-quarter results thanks to solid bookings and robust onboard spending. The demand for cruises, probably an activity for the wealthier, shows that this mass reduction of rich Americans does not yet exist.
But some think twice before swiping their card or clicking the purchase button.
Consumers in general have become more price-sensitive, according to several examples in the Fed’s periodic collection of jokes known as the Beige Book.
“When we talk to CEOs and CFOs, they say people are reacting, so companies now don’t feel as comfortable forcing price increases,” said Jacobson of Hartford Funds.
“And company profits in the consumer discretionary space should continue to be watched for signs of consumer stress.”
Ariel Barnes spiraled into credit card debt in college, and a decade later, she still hasn’t managed to escape.
Barnes, a gift processing manager at Jackson State University, has maxed out seven credit cards and is struggling to make minimum payments on $30,000 in credit card debt.
“The interest is so high that it’s hard to escape,” Barnes, who is 28 and lives in Jackson, Mississippi, told CNN in a phone interview Thursday.
Barnes is hardly alone.
Approximately one in seven (15.3%) Gen Z credit card borrowers have maxed out their credit cards, according to new research from the Federal Reserve Bank of New York. (The New York Fed defined Gen Z as borrowers born between 1995 and 2011, although others mark the cutoff as 1996 or 1997.)
By comparison, only 4.8% of Baby Boomer borrowers and 9.6% of Gen Xers have maxed out their credit cards, which could be a sign of a serious cash flow problem, reports the my colleague Matt Egan.
Read more here.
Monday: Earnings from Palo Alto Networks, Trip.com and Zoom. Federal Reserve officials Michael Barr, Christopher Waller, Philip Jefferson and Raphael Bostic provide remarks.
Tuesday: Earnings from Lowe’s, AutoZone, Macy’s and Urban Outfitters. Federal Reserve officials Christopher Waller, John Williams, Raphael Bostic, Michael Barr, Loretta Mester, and Susan Collins provide commentary.
Wednesday: Earnings from NVIDIA, TJX, Target, Guess?, Petco, Children’s Place and Red Robin. The UK Office for National Statistics releases inflation data for April. The National Association of Realtors reports home sales for April. The Federal Reserve releases the minutes of its May policymaking meeting.
Thursday: Earnings from Intuit, Medtronic, Workday, Ross, Dollar Tree, Burlington, Ralph Lauren, Build-A-Bear Workshop and 23andMe. The US Department of Labor reports the number of new unemployment claims for the week ending May 18. The Chicago Fed releases its April National Activity Index. S&P Global releases May business surveys measuring economic activity in the U.S. manufacturing and services sectors. The US Department of Commerce reports new home sales for April. Atlanta Fed President Raphael Bostic delivers remarks.
Friday: Winnings from Booz Allen Hamilton, Buckle and Big Lots. The US Department of Commerce reports new durable goods orders for April. Fed Governor Christopher Waller delivers remarks. The University of Michigan releases its final consumer sentiment reading for May.