The American economy continues to defy recession predictions, with consumer spending remaining surprisingly resilient through 2023 and into this year. But dig beneath the surface numbers, and a more complex picture emerges – one that reveals a tale of two distinct consumer classes moving in dramatically different directions.
Recent data from the Commerce Department shows overall consumer spending grew at a modest 2.5% annual rate in the first quarter. This figure, while respectable, masks a significant divergence happening across income brackets that’s reshaping our economic landscape.
“We’re witnessing what economists call a ‘bifurcated consumer economy,'” explains Jeffrey Cleveland, chief economist at Payden & Rygel. “High-income households continue spending robustly while lower-income consumers increasingly struggle with necessities.”
The numbers tell a compelling story. Bank of America’s internal data reveals spending among households earning over $125,000 annually has increased by roughly 5.2% compared to last year. Meanwhile, spending among those earning under $50,000 has essentially flatlined.
This spending divergence appears across multiple sectors. Luxury retailers like LVMH, parent company of Louis Vuitton, reported a 17% revenue increase last quarter. Similarly, Hermès posted 16% growth, with its CEO Guillaume de Sezanne noting “particularly strong momentum in the Americas.” Contrast this with Dollar General and Dollar Tree, which primarily serve lower-income communities and have reported declining comparable store sales.
Travel data reinforces this pattern. Delta Air Lines CEO Ed Bastian recently told investors, “Premium leisure travel demand remains extraordinarily strong,” explaining how higher-income travelers continue booking first and business class tickets despite elevated prices. Meanwhile, budget airlines like Frontier have warned of softening demand among price-sensitive consumers.
The phenomenon extends beyond retail and travel. The housing market, perhaps the most telling economic indicator, shows high-end properties moving briskly while entry-level housing sits idle. According to the National Association of Realtors, homes priced above $750,000 saw sales increase 9% year-over-year, while those under $250,000 declined by 11%.
What’s driving this divergence? Several factors appear to be at work simultaneously.
First, the wealth effect from stock market gains disproportionately benefits higher-income households. The S&P 500’s impressive 24% gain in 2023 and continued strength in 2024 has bolstered confidence among affluent consumers who hold the vast majority of market assets.
“Nearly 90% of stocks are owned by the wealthiest 10% of Americans,” notes economist Julia Coronado of MacroPolicy Perspectives. “When markets rise, these households feel a wealth effect that directly translates to spending power.”
Second, the post-pandemic labor market has rewarded high-skilled workers while inflation has eroded purchasing power for those at lower income levels. Federal Reserve data indicates real wages for workers in the top quartile have grown 3.1% since 2019, while those in the bottom quartile have seen a 2.7% decline when adjusted for inflation.
The stark contrast in spending patterns has significant implications for the broader economy. Luxury and premium goods companies are thriving, while mass-market retailers struggle. This helps explain how consumer spending can remain positive overall despite surveys showing growing financial stress among average Americans.
“The economy isn’t necessarily as strong as headline numbers suggest,” warns Diane Swonk, chief economist at KPMG. “When spending growth is concentrated among a small slice of consumers, it creates vulnerabilities in the system.”
For investors and business leaders, understanding this bifurcation is crucial for forecasting. Companies serving affluent consumers may continue to outperform, while those dependent on middle and lower-income spending face headwinds as pandemic savings deplete and credit card balances hit record highs.
Federal Reserve officials are closely monitoring these trends. Minutes from recent Fed meetings acknowledge the divergence, with some members expressing concern about the sustainability of spending patterns heavily reliant on high-income consumers.
The policy implications extend beyond monetary decisions. The growing gap between consumer classes raises questions about economic stability and inclusive growth. While luxury spending can keep GDP figures positive, a healthy economy ultimately requires broad-based participation across income levels.
For now, the strength of affluent spending appears sufficient to keep the economy expanding, albeit at a modest pace. The Commerce Department forecasts 2.4% growth for 2024, a figure that would have seemed improbable during the interest rate hikes of the past two years.
Whether this bifurcated consumer economy represents a temporary phenomenon or a more permanent structural shift remains to be seen. What’s clear is that traditional economic indicators may no longer tell the complete story of American prosperity.
As we navigate this two-track economy, perhaps the most important metric isn’t overall consumer spending, but rather how broadly that spending is distributed across the economic spectrum. By that measure, the current expansion looks considerably less robust than headline figures suggest.
