A Tale of Two Economies: High and Low-Income Spenders

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Consumer spending is the backbone of the U.S. economy, and the fact that Americans kept their wallets handy throughout the steep inflation of the past years helped the economy stay resilient.

But a closer look reveals that it’s not quite so simple. While high-income earnings are behaving one way, lower and middle-income households are spending differently, creating a two-tiered economy.

Spending and Sentiment Split

Spending by lower and middle-income consumers has softened this year, according to a Bank of America analysis on card spending. Last year, on the other hand, was a strong spending year for these groups, as average wages grew.

Data from the University of Michigan’s consumer sentiment index underscored these trends, showing sentiment among the top-third earners is improving more than that of lower-income spenders. It all comes back to this: While the economy is chugging along nicely, many Americans are feeling pressured by high prices on virtually everything, from discretionary items to groceries.

It also means that the economic expansion may be disproportionately driven by wealthier households. But this lopsided spending strength leaves the economy more fragile than if it were experiencing a more widespread trend. 

Corporate earnings calls confirm this divide. McDonald’s (MCD), Coca-Cola (KO), and Olive Garden-owner Darden Restaurants (DRI) have reported that lower-income customers have reduced spending. This can put companies, and the economy as a whole, on less stable footing.

This week will give us the next look at consumer price inflation. While prices aren’t expected to decline any time soon, a slower ascent would be welcome by many.

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