"US Consumption Polarizes: High-Income Families as Main Force"

On October 11th Eastern Time, the Federal Reserve's latest retail expenditure study revealed that the driving force behind the U.S. economic growth has shifted from a balanced consumption pattern across all income levels to one primarily driven by high-income individuals.

Federal Reserve economists, including Sinem Hacıoğlu Hoke, pointed out in the report that the consumption growth of these high-income individuals has been fueled by the rise in asset prices such as real estate and stocks. As a result, they have enjoyed the "wealth effect" and have gained additional spending power from higher interest and investment income.

Post-COVID-19 pandemic, high-income households have stronger purchasing power.

In the two years prior to the pandemic outbreak, the growth rate of household consumption across all income levels was relatively uniform.

However, after the pandemic, there was a noticeable divergence in consumption patterns among different income groups. The study shows that households with higher incomes experienced significantly greater consumption growth post-pandemic compared to those with lower incomes.

Especially during the initial phase of the pandemic up to mid-2021, government stimulus plans helped low-income households significantly increase their consumption, with a growth rate that even surpassed middle and high-income households. But as government pandemic relief payments ended, consumption among low-income households began to decrease, while consumption among middle and high-income households continued to grow, becoming the main driving force behind economic growth.

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According to the Federal Reserve's research data, since 2018, consumption growth among high-income households has been more than double that of low-income households. This explains why U.S. consumer demand has been so strong in recent years. Despite many analysts predicting a slowdown in economic growth, the economy has exceeded expectations due to the sustained consumption of high-income individuals.

Federal Reserve researchers also found that Americans, regardless of wealth, are more willing to spend money than they were six years ago. However, recently it has been primarily those in the middle and high-income brackets who have been driving consumption, while consumption among low-income individuals has fallen back, only recently returning to the levels seen in mid-2021. These figures have taken into account the impact of inflation.Federal Reserve economists Sinem Hacioglu Hoke and others wrote that one possible reason for this difference is that high-income households have become wealthier due to rising housing prices and stock markets, enjoying the so-called "wealth effect." In addition, they can earn more interest and investment income when interest rates are higher, which provides motivation for their continued consumption.

Consumers with higher education spend more

The Federal Reserve's research is based on shopping data provided by the consumer data company Numerator, which collected shopping receipts from 150,000 representative American households. Researchers said that these data match the sales data of retail stores, enhancing their confidence in the accuracy of the data.

When divided by demographic groups, the consumption growth of people with higher education is more significant. Before the pandemic, the consumption growth of different groups was more balanced, but now, consumers with higher education spend noticeably more, which also reflects the changes in the consumption structure after the pandemic.

Homebuyers with low interest rates have more consumption capacity

The study also shows that renters (usually with lower incomes) had the fastest consumption growth at the beginning of the pandemic, but since 2018, their overall consumption growth has been the smallest. Homeowners who bought houses in 2020 and 2021 and locked in fixed loans at low interest rates have more disposable income and can continue to spend more on goods and dining.In contrast, Americans who have purchased homes since 2022 have been less fortunate. They typically buy homes at higher prices and incur higher debt-to-income ratios. These new homeowners have not benefited from overall consumption growth; instead, high housing prices and high levels of debt have affected their spending power, and their actual retail consumption has been declining since mid-2022.