What If High Earners Stop Spending?

Spending Slowdown

Lower-income households have been hit harder by the high price environment of the past years. While wealthier households had the opportunity to downshift to cheaper grocery stores or store brand products, for example, those with less income may not have had that opportunity.

Economists have characterized the economy as “bifurcated” or “two-speed” to describe that higher earners continue to spend, while lower earners are struggling. But the gap between the two groups may be narrowing.

Eating In

Roughly two-thirds of U.S. households earning $150,000 or more per year consider their credit card balances to be above average, compared to less than half (46%) of consumers, per an August survey by Mizuho (MFG) cited in a MarketWatch report. And that’s not the only sign that a spending slowdown could potentially be on the horizon.

Some 3 in 5 respondents to the Mizuho survey said they cut back on restaurant spending in the past six months, and others plan to do so in the coming months. This trend was particularly pronounced among higher earners, the survey found.

Despite these red flags, high-income households reported that financial conditions seemed strong overall, while lower-income families felt conditions had notably worsened in the past six months.

Companies Respond

Retailers, restaurants, and consumer brands are taking notice.

McDonald’s (MCD) and Home Depot (HD) said during recent earnings calls that cost-conscious consumers are leaving a dent in sales. If high-income Americans pull back on discretionary spending, it could create turbulence for more businesses’ bottom lines — not to mention the broader U.S. economy, where consumer spending accounts for some two-thirds of economic growth.

At the same time, the Federal Reserve is expected to start cutting interest rates in September, which would provide relief to borrowers and could boost spending.

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