Signal of a recession?
For variety of reasons, wealthy folks cut back
For a variety of reasons, including a volatile stock market, affluent Americans have had to cut back on spending this year.
A few years ago, Alesia Peterke of Pleasanton, California, thought nothing of plunking down $275 for a Coach handbag.
“I would have wanted to keep up with the Joneses,” Peterke, 52, says.
Now, she buys $60 purses that last just as long, hunts for bargains and prefers to spend money on experiences, such as trips to see relatives.
“As a family, we have the things we need and want,” Peterke says. “We will continue to spend, but we are smarter consumers.”
Higher-income Americans are reining in their spending for myriad reasons, including a volatile stock market, shoppers’ fatigue and modest wage increases. The trend is noteworthy because the top 10% of households by income make up nearly half of all consumption.
Overall consumer spending growth, in turn, is slowing at a crucial period for the economy. Many analysts are looking to households to prop up growth as business investment slumps amid a trade war that poses the risk of a recession by next year.
Spending by the top 10% fell 1% in the second quarter from the same period last year, according to an analysis of Federal Reserve data by Moody’s Analytics. And a four-quarter average of outlays by the high earners has slipped on an annual basis the past three quarters, marking the first such declines since the Great Recession of 2007-09.
“High-income consumers have been the Atlas holding up the U.S. and global economies,” says Mark Zandi, chief economist at Moody’s Analytics. “But they appear tired, and if they founder, so too will the economic expansion.”
Consumer spending more broadly is still growing solidly, but at a slower pace. Household outlays increased 2.9% at an annual rate in the third quarter, down from a robust 4.6% early in the year. Capital Economics expects purchases to increase by 2% to 2.5% in the current quarter.
One factor in the downshifting by the affluent might be that they’re preparing for retirement. A fast-growing number of affluent baby boomers are cutting spending and beefing up their nest eggs as they approach retirement. Boomers saved 17.7% of their income in the second quarter, up from 12.3% a year earlier, Moody’s data show.
Carole Dempsey, 58, of New Bern, North Carolina, says she and her husband have stopped taking vacations and eating out and decided to forgo the addition of a screened-in porch.
“We don’t think the market is going to hold,” she says, adding they’ve been more cautious since President Donald Trump’s election created more uncertainty. “We have no confidence in the stability of the economy.” And if Social Security and Medicare are scaled back, “you may have nothing.”